Ahead of Rachel Reeves’ Autumn Budget, there was a flurry of speculation about potential changes to taxes, benefits, and other financial matters. Despite experts advising caution against premature actions before official announcements, some individuals took what they thought were precautionary steps.
Fearing a significant reduction in the tax-free lump sum limit for pension withdrawals, many rushed to take out as much as possible, hoping to either save on taxes if the threshold was lowered or to reinvest the money if changes weren’t made.
However, HMRC has now issued a stark warning to those savers, stating that the “cooling off period” offered by some pension providers, which might have allowed for such reversals, doesn’t actually apply in these cases.
This policy is only applicable to new products, whereas returning the withdrawn lump sum would be considered an addition to an existing product. HMRC has made it clear: “The payment of a tax-free lump sum cannot be undone and the member’s lump sum allowance will not be restored.
“The lump sum must be tested against their lump sum allowance at the time the lump sum was paid from their pension scheme.
“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.”
People who have protectively withdrawn a lump sum from their pension could be hit with a tax bill if they try to return the money, following a recent ruling that has been challenged by pension providers. Brits are allowed to take 25% of their pension pots as a completely tax-free lump sum, up to a maximum of £268,275.
Prior to the Budget, there was widespread speculation that this limit would be reduced to as low as £100,000, but in the end, the cap remained untouched. Actress Julia Westcott-Hutton is among those affected, having withdrawn £138,000 from two of her personal pensions just before the Budget.
She told The Telegraph that while the feared pension change didn’t materialise, she’s now likely to face an increased capital gains tax when investing the lump sum she withdrew.