Savers who took out a lump sum to re-invest after this date could face a nasty surprise from the taxman.
Pensioners could be hit hard by the Chancellor (Image: Getty )
Prudent savers who returned their tax-free lump sum back into a pension could face an eye-watering tax bill of up to 70%. Under current HMRC guidelines, people can usually take 25% of the amount built up in any pension as a tax-free lump sum, up to a limit of £268,275.
Many pensioners take a lump sum to pay off mortgages or to support children through university, but following reports last year Chancellor Rachel Reeves was considering cutting the tax-free allowance to £100,000, many savers sought to withdraw their lump sums early. According to the Financial Conduct Authority (FCA), pension withdrawals increased by £20 billion in the 2024-2025 tax year when compared with the previous 12 months.
Now HMRC have said pensioners who took out their lump sum after December 5 would not be allowed to put it back into a pension, and the tax man could pursue those who put the sum back since that date on a “case-by-case” basis.
The Chancellor is reportedly set to target pension savers (Image: Getty )
The Telegraph reports those who made the decision to take out a lump sum but then returned it to a pension since December 5 could now face charges of 55%, and in some cases 70%.
The FCA usually allows customers a 30-day cooling-off period after signing up to a financial product, but HMRC said: “Unauthorised payment 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.”
Andrew Tully, of Nucleus, told The Telegraph: “For HMRC and FCA to determine that there are, in practical terms, no cancellation rights for those who want to reconsider their decision a few days later, belies belief.
“We run the risk of some people not understanding and ending up facing a 70pc tax charge on what they expected to be a tax-free lump sum.”
Rachel Reeves is reportedly set to target pension savers who returned their lump sum (Image: Getty )
A source at a pension provider added they were “surprised that HMRC is going after this” and that there was a difference of opinion between HMRC and the FCA which could result in a “consumer protection gap” if firms are still advising customers to take a lump sum which they are later taxed heavily on.
In a newsletter this month, HMRC said that registered pension schemes should “take care to ensure that appropriate arrangements are in place to mitigate any adverse tax outcomes”. It continued: “When offering cancellation rights, registered pension schemes should continue to ensure that members are aware of the tax consequences if those rights are exercised.”
A statement issued at the same time by the FCA said: “Under our rules, consumers have the right to cancel certain contracts, typically within 30 days of entering the contract, if they change their mind.
“However, the right to cancel does not arise in all circumstances. A consumer accessing tax-free cash in itself does not trigger cancellation rights under our rules.
“Our rules do not exempt firms from HMRC requirements. This means firms should be mindful how they structure their contracts in light of the interaction between HMRC requirements and ours.”
A spokesman for HMRC told the Telegraph: “We made our position on the tax rules around returning tax-free lump sums clear on Dec 5, 2024. We will seek to challenge alternative interpretations of these rules after this date.”
