People who rushed to grab a tax-free lump sum from their pension pots ahead of the budget have been blocked from making a U-turn, it has emerged.
Ahead of the budget, financial advisors reported a rush by people to grab the cash because they were worried that the Chancellor would cap or curtail the perk.
In fact, Rachel Reeves decided to make no changes to the rules which allow people to withdraw 25 percent of the nest egg up to a maximum of £268,275.
The decision means that those people who tried to beat the feared budget change and took their lump sum out early have lost the opportunity to leave the money in their pension pot in the expectation it would continue to grow.
A number have tried to reverse their decision, however the HMRC currently takes the view that this is not allowed.
Savers claim they took their lump sum withdrawal decision on the basis of guidance that they had a 30-day cooling-off period, including the right to reverse the transaction after it had been received.
However, in a newsletter published last week, HMRC said that the practice was in breach of tax rules.
The tax authority said cooling-off periods do not apply to such withdrawals, adding: “The payment of a tax-free lump sum cannot be undone and the member’s lump sum allowance will not be restored.”
Furious pension providers have hit back at HMRC and urged it to either reconsider or provide a solution for savers who may have lost some or all of their tax-free lump sums.
Providers cited guidance from the Financial Conduct Authority (FCA) which states that consumers taking out “a contract to vary an existing personal pension scheme by exercising, for the first time, the right to make income withdrawals” are entitled to a cancellation period, which they have interpreted to include cash lump sums.
Lisa Picardo, at PensionBee, told the Telegraph: “It is widely understood across the industry that consumers have a right to cancel using a 30-day cooling-off period and preserving their tax-free allowance.
“HMRC’s recent assertion threatens to undermine the FCA’s principles of consumer duty and is causing uncertainty and harm. We urge HMRC to reconsider its stance and collaborate with the FCA to ensure the financial services industry can continue to fully support and protect consumers.”
Earlier this week, pension firm, Hargreaves Lansdown, decided it would no longer offer its customers a cooling-off period following HMRC’s newsletter.
Aviva and Aegon also do not permit the reversal of withdrawals.
Mike Glenister, of pension and investment firm AJ Bell, described HMRC’s rules as “nonsensical”.
He said: “Entering drawdown and taking your tax-free cash are part of a single, intrinsically linked financial decision. It would therefore be nonsensical to require firms to offer cancellation rights for drawdown without those applying to both the decision to enter drawdown and the receipt of tax-free cash.
“HMRC’s stance risks leading to unnecessary and avoidable consumer detriment. The small number of people who choose to reverse their drawdown decision are doing so because they have genuinely changed their mind and are not seeking, or receiving, any tax benefit for doing so.
“We are engaging with HMRC on this issue and hope to reach a sensible conclusion that is designed to help give customers the best outcomes.”
Steve Webb, partner at pension consultants LCP, said: “Under normal circumstances, a consumer would have a right to change their mind about taking out a financial product and could reverse the transaction during a cooling-off period.
“But this right seems to be clashing with HMRC rules which do not allow people to undo pension withdrawals. What is needed is a joint statement from FCA and HMRC making the rules clear so that individuals are not left in a confusing and uncertain position”.
James Carter, of pension platform Fidelity, said: “We understand that HMRC and the FCA are discussing the issue in light of the potential inconsistency between HMRC’s recent statement and the FCA’s rules, and aim to respond again as soon as possible.”
An HMRC spokesman said: “We’re in discussions with the Financial Conduct Authority regarding this issue.”
