A MAJOR update on pension withdrawals has been issued after thousands of savers scrambled to take money out of their pot ahead of the Budget.
Pension withdrawals surged 36% in 2024/25 amid speculation that the amount of tax-free cash you can take out of your pension could be cut.
A major update on withdrawing cash from your pension has been issuedAlamyYou can currently take up to 25% of the value of your pension pot as a tax-free lump sum.
The most you can withdraw is £268,275.
Experts have warned savers against taking cash from their pot due to Budget fears as doing so can have a huge impact on their retirement savings.
Now HM Revenue & Customs (HMRC) and the Financial Conduct Authority (FCA) have issued a huge update on whether withdrawing money from your pot can be reversed.
In its newsletter HMRC confirmed that when a person takes a lump sum from their pension they cannot reverse the decision.
It said: “Once lump sums are paid, the associated tax consequences (including the use of the individual’s lump sum allowance and lump sum death benefit allowance) cannot be undone, even if the payment is returned or cancellation rights are exercised.”
Usually, when you take out a financial product and the FCA’s rules apply you are entitled to a 30 day cooling off period.
For example, you could decide to transfer your pension or join a personal pension scheme but then choose to cancel it within 30 days.
This also means that any tax implications can also be reversed.
But these rules don’t apply when withdrawing money from your pension.
HMRC added that although it does not offer a 30-day cooling-off period, registered pension schemes can allow customers to cancel taking their tax-free lump in certain circumstances.
For example, a pension scheme may allow you to take your tax-free lump sum as part of a contract when you join a pension scheme.
It may also form part of your contract when you transfer your pension.
In these circumstances pension companies can decide to voluntarily give customers the right to cancel a pension withdrawal.
What are the different types of pensions?
WE round-up the main types of pension and how they differ:
Personal pension or self-invested personal pension (SIPP) – This is probably the most flexible type of pension as you can choose your own provider and how much you invest. Workplace pension – The Government has made it compulsory for employers to automatically enrol you in your workplace pension unless you opt out. These so-called defined contribution (DC) pensions are usually chosen by your employer and you won’t be able to change it. Minimum contributions are 8%, with employees paying 5% (1% in tax relief) and employers contributing 3%. Final salary pension – This is also a workplace pension but here, what you get in retirement is decided based on your salary, and you’ll be paid a set amount each year upon retiring. It’s often referred to as a gold-plated pension or a defined benefit (DB) pension. But they’re not typically offered by employers anymore. New state pension – This is what the state pays to those who reach state pension age after April 6 2016. The maximum payout is £203.85 a week and you’ll need 35 years of National Insurance contributions to get this. You also need at least ten years’ worth to qualify for anything at all. Basic state pension – If you reach the state pension age on or before April 2016, you’ll get the basic state pension. The full amount is £156.20 per week and you’ll need 30 years of National Insurance contributions to get this. If you have the basic state pension you may also get a top-up from what’s known as the additional or second state pension. Those who have built up National Insurance contributions under both the basic and new state pensions will get a combination of both schemes.In its update the FCA said: “Our rules do not prevent a pension provider from choosing to offer cancellation rights in their contracts in additional circumstances beyond those set out in our rules.”
HMRC said that once the money is paid the tax consequences of withdrawing the money cannot be reversed, even if the payment is returned or cancelled.
For example, if you take £20,000 out of your pot but cancel the withdrawal then the sum would still count towards your 25% allowance.
Why are savers racing to withdraw money from their pension?
Experts suggest that fears about the Budget and rumours around what could be announced are causing people to pull cash from their pensions.
However, it is not yet known what measures the Chancellor will announce in her Budget on November 26.
Among the proposals still on the table is a cut to the tax-free lump sum allowance.
But experts warn that a kneejerk reaction to Budget speculation can have long term effects on your retirement savings.
Jamie Jenkins, director of policy at Royal London, warns that taking your tax-free lump sum can have “significant implications”.
He said: “Some people may still be saving towards their retirement, and taking 25% tax-free now could be worth less than had they left it until their overall pension pot grows further.
“If the money isn’t needed immediately, holding it in a bank account may depreciate its value over the years that follow, instead of remaining invested in their pension and benefiting from potentially higher returns.”
Meanwhile, Philip Lewis, head of financial planning advice at Evelyn Partners, warned that taking your lump sum could also land you with a surprise tax bill.
He said: “Any interest, income or capital gains that the sum earns from then on could be subject to tax unless it falls within allowances or is placed in another tax-protected wrapper like an Isa.”
He recommends that savers who take their tax-free lump sum should have a clear purpose for it, such as paying down their mortgage, giving to family or using it as income.
Always speak to a financial adviser before you make decisions about your pension.
To find one visit unbiased.co.uk.
Do you have a money problem that needs sorting? Get in touch by emailing money-sm@news.co.uk.
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