Tax-free pension withdrawals: HMRC and FCA clarify cancellation rights

HMRC and the Financial Conduct Authority (FCA) have issued a joint statement clarifying how tax legislation interacts with regulatory rules on pension cancellation rights. The update highlights the risks associated with rushing to access tax-free cash, particularly in the lead-up to potential changes in pension tax policy.

The FCA confirmed that whilst its rules provide consumers with cancellation rights for certain contracts, typically within 30 days, these rights do not apply universally. Specifically, accessing tax-free cash from a pension does not automatically trigger cancellation rights.

Only transactions explicitly covered by FCA rules, such as pension transfers or joining a personal pension scheme, carry mandatory cancellation rights. In these cases, if a member changes their mind within the cancellation period, the associated tax consequences may be reversed.

Contracts that allow a member to take a Pension Commencement Lump Sum (PCLS) are not considered cancellable under FCA rules. As a result, once a lump sum is paid, the member’s lump sum allowance (LSA) or lump sum death benefit allowance (LSDBA) is considered used even if the payment is returned.

In some cases, where a PCLS is part of a broader cancellable contract such as a pension transfer or scheme variation, cancellation rights may apply. However, if cancellation rights are offered voluntarily outside these scenarios, providers must ensure clients understand that tax consequences will still apply and cannot be undone once payments are made.

HMRC reinforced this point:

“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 clarification serves as a reminder for client to carefully consider the implications of accessing tax-free cash, especially in anticipation of potential Budget changes. Decisions made on the basis of speculation may result in irreversible tax outcomes.

Some voices in the industry have called for more flexibility in how cancellation rights and tax consequences are handled, especially in cases where a withdrawal is later deemed inappropriate due to changing circumstances. They argue that a rigid approach may not align with the goal of achieving fair outcomes for consumers.

There is ongoing dialogue between regulators and industry stakeholders to ensure that operational impacts are clarified and that consumers are effectively supported. Clear communication remains essential to help individuals make informed decisions about their pensions.

Amid growing concerns over pension policy stability, AJ Bell has launched a petition urging the government to commit to a Pension Tax Lock, protecting tax-free cash withdrawals and pension tax relief for the duration of the current Parliament.

The petition responds to fears that speculation around policy changes may push savers into irreversible decisions, such as accessing tax-free cash prematurely. This aligns with the HMRC and FCA guidance, which cautions that accessing pension funds prematurely can lead to tax consequences that cannot be undone.