HR leaders have been urged to remind employees to think carefully before accessing tax-free pension cash.
The warning comes after HMRC and the Financial Conduct Authority (FCA) confirmed that 30-day cancellation rights may not apply once lump sums have been taken from savings.
People withdrawing a lump sum from their pension might assume they can reverse the decision with no consequences.
But a clarification, published in HMRC’s Pension Schemes Newsletter 173 alongside an FCA statement, makes it clear that tax consequences will usually remain even if the payment is returned to the pension.
HMRC said: “If an action has resulted in a tax consequence, and an attempt is made to reverse the action, normally the resulting tax consequences cannot be reversed. The tax consequences will normally stand.”
This matters for employers because there has been speculation that the chancellor may restrict the amount of tax-free cash that can be withdrawn from pensions in the November budget.
Last year, similar rumours prompted a rush of withdrawals, with some individuals assuming they could “undo” the decision if no policy change emerged.
Speculation raises the risk that employees might act hastily in the coming weeks, only to find that they cannot reverse the decision or the associated tax impacts.
“Once lump sums are paid, the associated tax consequences (including the use of the individual’s lump sum allowance and lump sum death benefit allowance) cannot be undone, even if the payment is returned or cancellation rights are exercised,” HMRC said.
The FCA stressed that cancellation rights only apply in limited cases. Under its Conduct of Business rules (COBS 15.2), a right to cancel arises for certain contracts such as pension transfers or contracts to join a personal pension scheme.
“Our rules, specifically COBS 15.2, ensure that a right to cancel applies when a consumer enters certain specified contracts,” the FCA said in its statement. “In the context of pensions and retirement, specified cancellable contracts include a pension transfer contract and a contract to join a personal pension scheme.
“A contract allowing a person to take a Pension Commencement Lump Sum (PCLS), sometimes known as a tax-free lump sum, is not listed as a cancellable contract in COBS 15.2 so a contractual term allowing someone to take a PCLS does not of itself trigger cancellation rights.”
Pension providers may voluntarily choose to offer cancellation rights, but the tax consequences will still apply.
The co-ordinated statements from HMRC and FCA highlight the importance of communicating clearly with employees about the risks of rushing to access pension cash based on budget speculation. Any withdrawal could carry permanent tax consequences.
