Savings decision “cannot be undone”

People who rushed to withdraw money from their pensions amid fears over a reduction in the amount they could take tax-free have been told they cannot go back on their decision. His Majesty’s Revenue and Customs (HMRC) has warned savers any tax-free withdrawal of money saved for pensions will not be restored if they change their minds and try to put the cash back in a plan.

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Currently, people can ‘draw down’ up to 25% of their pension plans tax-free up to a maximum of £268,275. However, there has been speculation Chancellor Rachel Reeves planned to reduce that amount, which prompted many to take their cash out to avoid any potential taxes.

The cap has not yet been lowered, but a letter sent out by HMRC is reported as saying they cannot change their mind and reinvest the money in pensions schemes.

“The payment of a tax-free lump sum cannot be undone and the member’s lump sum allowance will not be restored,” an HMRC update reportedly said. “The lump sum must be tested against their lump sum allowance at the time the lump sum was paid from their pension scheme.”

HMRC has said any ‘cooling off period’ offered by some pension plans doesn’t apply, according to reports, with the update adding: “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.”

Among those affected was pensioner, Julia, who according to The Telegraph withdrew £138,000 from her pensions to avoid paying any tax should the cap be reduced. “I wanted to take the cash as I thought I might not ever get this chance again,” she told the paper. “There was nothing in particular I wanted to use the money for, I live a very simple life.”

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After trying to reverse her decision, she said the pension firm refused. “At first, they told me they had never heard of such a policy, and then when I persisted, they just flat-out refused,” she went on. “They told me once you’ve taken it, you’ve taken it, no turning back.

“It’s not the end of the world but it is quite a lot of money. I don’t get the same benefits from investing it now, as I’ll need to pay capital gains tax – and it’s even worse, now that that has gone up too.”

Financial advice firm Hargreaves Lansdown details the tax-free pension withdrawal scheme by saying: “You can normally access your pension from age 55 (rising to 57 from 2028). If you have a defined contribution pension (like a Self-Invested Personal Pension), up to 25% can usually be paid to you completely tax free (normally up to a maximum of £268,275), and the rest will be taxed as income.

“If you have a defined benefit (e.g. final salary) pension, the scheme rules will normally control how much tax-free cash you’ll receive and how you can take it.”