HMRC and the Financial Conduct Authority (FCA) have issued a joint statement clarifying the interaction between tax legislation and regulatory rules on pension cancellation rights, which industry experts have highlighted as evidence of the risks of rushing to access tax-free cash.

The FCA confirmed that whilst its rules give consumers the right to cancel certain contracts, typically within 30 days, if they change their mind, cancellation rights do not apply in all circumstances and that simply accessing tax-free cash does not, in itself, trigger cancellation rights.

It also explained that only where FCA rules require a cancellation right, such as the 30-day cancellation of a pension transfer, can tax consequences be reversed.

The FCA said: "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."

In the pensions context, cancellable contracts include pension transfer contracts and contracts to join a personal pension scheme.

By contrast, a contract allowing someone to take a Pension Commencement Lump Sum (PCLS), commonly known as a tax-free lump sum, is not classed as a cancellable contract under COBS 15.2.

As lump sum payments are not cancellable contracts, this means that once paid, the use of a member’s lump sum allowance or lump sum death benefit allowance will remain, even if the payment is returned.

The FCA emphasised that decisions around structuring PCLS arrangements remain a “design choice” for firms, which must also consider tax legislation.

It also pointed out that taking a PCLS and designating funds for drawdown are separate activities and do not need to happen at the same time, and that a PCLS can also be combined with an annuity.

Much of the rules are dependent on the specific situation, as where PCLS forms part of a cancellable contract such as joining a pension scheme, a transfer, or varying a scheme for income withdrawals, cancellation rights may apply.

However, if cancellation rights are voluntarily offered in other scenarios, the FCA emphasised that providers must ensure customers understand that tax consequences will still apply and cannot be undone once payments are made.

"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," HMRC also confirmed. "The tax consequences will normally stand."

Industry experts have flagged the update as a demonstration of the risks that pre-Budget rush to access tax-free cash can have, noting that, in the run-up to last year’s Budget there was a rush of people accessing larger pension pots.

Indeed, FCA figures showed that over 25,000 people accessed pots worth £250,000 or more in the six months to September 2024, representing a more than 50 per cent increase compared to the same period the year before.

LCP suggested that it is highly likely that many people did so in anticipation of the potential capping or scrapping of the right to take 25 per cent of a pension in the form of a tax-free lump sum.

Given this, LCP partner and head of pensions and tax, Alasdair Mayes, said: "The latest statements by HMRC and the FCA are a reminder that people should think very carefully before making major financial decisions based on speculation about what might be in the Budget.  

"In particular, in many cases it may be impossible to undo the tax implications of such a decision if it turns out – again – that there is no Budget change to pension tax relief.  For example, people who try to reverse their decision after a Budget may find that they have irreversibly used up some of their lifetime limit of tax-free lump sums.  

"The exact rules clearly depend on the precise nature of the transaction and individuals need to be sure that they understand the full consequences of any decision taken in advance of the Budget”

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