HMRC update on retrospective approach to tax free lump sum reversals

HMRC has provided updated guidance on lump sum reversals in its 30 October 2025 newsletter. This offers some comfort on the tax implications for those who completed reversals via cancellation rights prior to 5 December 2024 on pension commencement lump sums (PCLS) and uncrystallised funds pension lump sums (UFPLS) taken ahead of the Autumn 2024 budget. It also explains the practical actions necessary now for scheme administrators.

This topic is also important for anyone planning to draw pension lump sums before the upcoming Autumn Budget on 26 November 2025.

Cancellation rights in the FCA Handbook

As a reminder, FCA Handbook provisions establish the framework for cancellation rights. 

Part of the FCA’s Conduct of Business Sourcebook, COBS 15.2.1. R is a rule which requires regulated firms to provide cancellation rights in certain circumstances. HRMC and FCA’s view is that this does not extend to lump sums. COBS 15.2.2. G is in contrast FCA permissive guidance which allows those same firms to offer longer or additional cancellation rights. 

What has happened previously?

Ahead of the 2024 Autumn Budget there were widespread rumours that rights to tax-free lump sums would be reduced, prompting some members to act early. Some members took their tax-free lump sum ahead of the Budget, and sought to rely on cancellation rights in respect of tax-free lump sums when the expected reduction did not materialise. 

HMRC clarified its position in Newsletter 165, published on 5 December 2024. As we previously noted, HMRC made it clear in that newsletter (and in the subsequent Newsletter 173 from September 2025 alongside a separate FCA statement), only actions in respect of cancellation rights required by COBS 15.2.1. R could reverse the tax consequences. Since UFPLS and PCLS are not one of the cancellable contracts set out in the table at COBS 15.2.1. R, “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.” [Newsletter 173].

What have HMRC said in Newsletter 174?

HMRC have now said (our emphasis):

We may challenge alternative interpretations of the tax consequences of tax-free lump sums that have been returned after 5 December 2024, when the position was made clear.

This gives comfort that reversals completed before this date will not be actively targeted by HMRC. 

The Newsletter also notes that:

• The conditions as set out in tax legislation will need to be met in order for the [PCLS] or [UFPLS] to remain an authorised payment if cancellation rights are chosen to be provided and those rights are exercised.
• HMRC expects registered pension schemes “to tell members of their reduced lump sum allowance and lump sum death benefit allowance, or report unauthorised payments in the usual way.” 

What does this mean?

For scheme administrators, the key takeaways are:

1. HMRC has indicated it may treat these reversals differently dependent on whether they were completed ahead of their 5 December 2024 Newsletter, or after that date. Operators should inform affected members of the tax consequences.
2. As a PCLS must be linked to an entitlement to pension under the tax legislation, there is a risk that as well as using up lump sum allowance and lump sum death benefit allowance, cancellation of the underlying pension contract may mean the PCLS itself becomes unauthorised.  Operators should consider the implications of this.
3. Review voluntary cancellation rights offered and how these are explained to customers, particularly around tax implications. The consumer duty should be factored into the approach.

If you would like to discuss this topic further, please contact Alice Honeywill.

This blog was written by Hercules Phillips and Alice Honeywill

We may challenge alternative interpretations of the tax consequences of tax-free lump sums that have been returned after 5 December 2024, when the position was made clear.

https://www.gov.uk/government/publications/pensions-schemes-newsletter-174-october-2025/newsletter-174-october-2025