James Jones-Tinsley, technical specialist at pension consultants Barnett Waddingham, reviews the updates this week from HMRC and the FCA on pension tax free lump sum cancellation rights. 

There had been many predictions within the media in the weeks leading up to the Autumn Budget in October last year, that led many people – particularly the non-advised – to withdraw their Pension Commencement Lump Sums (PCLS), otherwise known as a tax-free lump sum, from their pensions prior to the Budget.

As things turned out, nothing affecting PCLS’ was announced by the Chancellor in her first Budget.

Understandably, a number of individuals who had withdrawn their full PCLS from their pension, asked their pension provider if they could repay it back into their pension, on the basis that they had a ‘cancellation period’ of 30 days after withdrawing it to do so, under the Financial Conduct Authority’s (FCA) Conduct of Business Sourcebook (COBS) rules.

HM Revenue & Customs (HMRC) then dropped a proverbial ‘bombshell’ in December 2024 when they announced that cancellation rights did not apply to a PCLS paid from an FCA-regulated pension arrangement, in contradiction to what much of the pensions industry had hitherto understood.

Naturally, urgent confirmation of the correct legal and regulatory position was demanded of HMRC and FCA by the pensions industry.

As we now approach this year’s Autumn Budget on 26 November, rumours are once again circulating that the Chancellor is looking to make changes to the amount of PCLS that can be taken from a pension.

In response to industry demands for clarification of whether cancellation rights do apply to a tax-free lump sum drawn from a pension arrangement, HMRC and FCA have this week simultaneously issued statements to provide long sought-after clarity.

What have HMRC and FCA said?

In summary, section 15.2.1R of the FCA’s COBS states that only the cancellation rights that are set out in that section can undo any tax consequences, as set out in HMRC regulations.

And although section 15.2.2G of COBS permits FCA-regulated firms to offer additional or longer cancellation rights to their members, these will not undo any arising tax consequences.

A PCLS and an Uncrystallised Funds Pension Lump Sum (UFPLS) are not covered by section 15.2.1R of COBS.

Therefore, any attempt to use a cancellation right to pay a PCLS or UFPLS back into a pension arrangement will not undo any Lifetime Allowance (LTA), Lump Sum Allowance (LSA), or Lump Sum Death Benefit Allowance (LSDBA) used up in initially taking the PCLS or UFPLS out of the pension arrangement.

Neither will it undo triggering the Money Purchase Annual Allowance (MPAA) when drawing a UFPLS from a Defined Contribution (DC) pension arrangement. Triggering the MPAA then limits future contributions to DC pension arrangements to no more than £10,000 gross per tax year.

This week's announcements make clear that those individuals who want to take either their full or a partial tax-free lump sum from their pension, ahead of this year’s Budget, will not then be able to pay it back into their pension within 30 days of doing so, (if nothing is announced in the Budget), in the belief that FCA cancellation rights applying to their pension arrangement, will cancel out their original decision, as if it never happened.

James Jones-Tinsley is a technical specialist at Barnett Waddingham on SSAS and SIPPs practice areas. He also presents to clients, advisers and other professionals on pension matters, liaising with the media on changes to pension legislation. James D Jones-Tinsley FPMI APFS, This email address is being protected from spambots. You need JavaScript enabled to view it.