Taking action in anticipation of pensions tax changes – HMRC and the FCA clarify when withdrawals can be unwound

On 25 September 2025, following FCA data released earlier that month highlighting a marked increase in pension withdrawals, HMRC and the FCA issued parallel statements regarding the interplay between tax free pension lump sums and FCA cancellation rights. 

Spoiler alert: in most cases a member’s decision to take a lump sum from their pension is irreversible – and even where the withdrawal itself can be unwound, the tax consequences are likely to stand.

Context

Over the past few weeks, we’ve seen a number of articles across the pensions and mainstream press highlighting a surge in both the number and value of withdrawals from pension schemes. As reported by the FT, according to the FCA’s response to a freedom of information request made by Evelyn Partners, over £10.4 billion was withdrawn in the six months to the end of March 2025. For context, that constitutes a 36.5% increase on the withdrawals made in the six months prior. 

There is speculation in the industry that the surge is largely driven by concerns over potential changes to pensions tax rules, both the changes to inheritance tax on unused pension pots and death benefits that have already been announced, and further potential changes that could be included in the Chancellor’s November Budget. A reduction in the cap on the amount of tax-free cash members can withdraw, or even removing it altogether, have been mooted by commentators as potential revenue sources for a cash strapped Chancellor in the past few weeks, alongside changes to salary sacrifice arrangements or to the rate of tax relief on pension contributions. Similar predictions are often made ahead of Budget announcements, including last year.

HMRC position – December 2024 

Although the FCA figures reveal a sharp increase in drawdown of pension benefits as well, the statements from HMRC and the FCA focus on the consequences of accessing tax free cash (either as a tax-free pension commencement lump sum (PCLS) or an uncrystallised funds pension lump sum (UFPLS) (where 25% of the lump sum is tax free)). 

HMRC’s statement in its most recent newsletter (no 173), should be read in conjunction with its December 2024 statement in newsletter 165. In December, HMRC stated that:

“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.”

One of the conditions for a payment to qualify as a pension commencement lump sum (PCLS) is that the lump sum is paid “in connection with” entitlement to a “relevant pension”, which must come into payment within 6 months of the lump sum being paid. The effect is that if the member’s does not access their pension or annuity, or put funds into drawdown within 6 months, the lump sum payment becomes unauthorised and an unauthorised payments charge will be due.

So, withdrawing a lump sum in anticipation of tax changes starts a ball rolling that cannot be easily stopped if the changes the member was acting in anticipation of do not come to pass.  It will also use up the member’s lump sum allowance irrevocably, even if their contract is structured in a way which allows for the return of the lump sum itself (see below).

HMRC / FCA statements – September 2025

Following on from December’s HMRC commentary, the September statements from HMRC and the FCA look specifically at the interplay between the tax position and the FCA’s rules on cancellation rights – is there anything in the FCA rules to help members of contract-based schemes who change their minds about taking their tax-free cash?

Broadly the answer is, probably not: 

• the starting position, as articulated by HMRC is that “once such lump sums are paid, the associated tax consequences… cannot be undone, even if the payment is returned or cancellation rights are exercised”;
• this is subject to the proviso that if a transaction falls within the FCA rules that mandate a cancellation right (FCA’s Conduct of Business Sourcebook (COBS) 15.2.1 rules), the tax consequences can be reversed if the individual changes their mind; 
• however, only the specific transactions listed in FCA rules benefit from this exemption. The FCA statement confirms that “a contract allowing someone to take a […] PCLS, sometimes known as a tax-free lump sum, is not listed as a cancellable contract […] so a contractual term allowing someone to take a PCLS does not of itself trigger cancellation rights”. 
• structures for taking PCLS vary, and a provider may be deemed to have included cancellation rights in a contract beyond those required by FCA rules, including in respect of a PCLS.
• however, because these “voluntary” cancellation rights are not required by the FCA rules, the tax exemption does not apply.

If a scheme or provider does offer voluntary cancellation rights including lump sums HMRC says they must “ensure customers understand that, once paid, the tax consequences of these lump sums will not be reversed, even if the payment is subsequently returned or cancelled” – this is the case even where the whole contract is cancelled. The tax consequences include any use of the lump sum or lump sum death benefits allowance, meaning that the allowance will be considered to have been used even where the lump sum is returned.

HMRC also notes that conditions in tax legislation must be satisfied for the lump sum payments to amount to an authorised payment if cancellation rights are provided and exercised. 

Key takeaways

Communication

For both trust and contract-based pension schemes, clear member communications regarding tax free lump sums are crucial, particularly in this pre-budget period where speculation is rife and the future feels uncertain – members who are not in possession of all relevant information may make decisions that they later regret. As a minimum, we would suggest that member communications highlight that withdrawing their lump sum is not usually a reversible decision, and that even if it is reversible, the tax consequences are unlikely to be (i.e. even if the member can return the lump sum, their lump sum allowance will still have been used). 

Schemes should consider taking proactive steps to assist members with understanding what pension tax changes have been proposed (e.g. the IHT changes, where a consultation has been conducted and draft Finance Bill produced), and which are only speculation at this stage. Of course, as always, care will need to be taken not to stray into territory that could be construed as financial advice – information should be provided in a factual way.

Cancellation rights 

An additional consideration for providers of FCA-regulated pension schemes is whether they do, and whether they should, provide voluntary cancellation rights to members under their contract in circumstances where it is not compulsory to do so under the FCA rules. 

If schemes do choose to provide cancellation rights in respect of lump sums, HMRC cautions them to “take care to ensure that appropriate arrangements are in place to mitigate any adverse tax outcomes”.

Retrospectivity

HMRC first issued a clarification statement in December 2024, so as a minimum we would expect it to take action in respect of any reversals of lump sum payments made on or after that. Prior to that, the industry had in many cases interpreted the COBS rules differently.

If you have any questions at all please do contact Alice Honeywill or your usual Burges Salmon contact. 

This blog post was written by Louise Pettit and Charlotte Gascoigne