State pensioners who withdrew 25% from their pensions due to fears they would be taxed in the Budget face being hit with a tax bill from HMRC due to a 30-day rule.
Pensioners can usually take up to 25% of the amount built up in their pension pot as a tax-free lump sum, up to a maximum of £268,275.
The lump sum doesn’t affect your Personal Allowance and tax is taken off the remaining amount before you get it.
Most financial firms have allowed a 30-day cooling off period for pensioners who have requested the tax-free allowance, which includes the right to put the money back with no charge.
But His Majesty’s Revenue and Customs (HMRC) has warned pension providers not to allow savers to return their tax-free lump sums or they could face “unauthorised payments charges”.
The government body said that under Financial Conduct Authority (FCA) rules, cooling off rights apply to the purchase of a new product only. But the payment of pension commencement lump sums (PCLS) or uncrystallised funds pension lump sums (UFPLS) is not a new product, which means cooling off periods don’t apply to these payments.
In a recent pensions newsletter, HMRC said: “The payment of a tax-free lump sum cannot be undone and the member’s lump sum allowance will not be restored.
“The lump sum must be tested against their lump sum allowance at the time the lump sum was paid from their pension scheme.
“Unauthorised payments charges may apply if contributions to pension schemes are made out of tax-free lump sums and the conditions for the recycling rule are met.”
Before the autumn Budget there was speculation that Chancellor Rachel Reeves would slash the tax-free pension lump sum allowance to address a reported £40 billion shortfall.
These rumours triggered a surge in pension withdrawal requests, but when the Budget was announced there were actually no changes to the tax-free lump sum rules.
The FCA’s website states that consumers are entitled to a cancellation period when first exercising pension income withdrawals, but it doesn’t specifically address tax-free lump sums.
HMRC confirmed: “Some pension contracts and policies allow for a cooling-off period. Under Financial Conduct Authority (FCA) rules, cooling off rights apply to the purchase of a new product only, for example the purchase of an annuity.”
