Chancellor Rachel Reeves is expected to target retirement pots in her Autumn Budget. This has triggered fears that more pension savers could be tempted to withdraw lump sums from their savings.
Savers are currently allowed to take 25% of their pension pot tax-free once they reach the age of 55. They are allowed to take out a maximum of £268,275. However, it has been reported that they will not be allowed to return the money despite being promised a 30-day cooling-off period after withdrawing the allowance. Despite previous guidance from the FCA, which allowed those who withdrew money to a cooling-off period, the HMRC is now expected to reverse the move, which means pension savers cannot return their tax-free money, according to reports.
As reported by the Telegraph, it is unclear whether people who have already returned their lump sum will be able to withdraw again without incurring income tax. People typically access their pension early to clear debt, support family with financial issues or help bridge the gap to retirement.
There has been confusion ahead of the upcoming Budget, with rumours that Ms Reeves will cut the tax-free lump sum allowance to £100,000. Last month, pension pot withdrawals surged by 61% compared to last year as savers tapped into their allowance.
However, experts are warning savers not to withdraw 25% of their allowance as it could reduce the amount of cash their pension can generate. They are urging people to have a clear plan before taking money out.
Those who withdraw money early are also at risk of running out of cash. Some people need the money to last for decades, but once it has been spent, it is hard to replace.
An expert at a leading pension provider previously urged the HMRC and the FCA to clarify the situation. They said: « The clarity is helpful for providers as we go into a period of uncertainty with the Budget.
« For the providers, the challenge will be how they communicate [the change] to their customers, but I’m not anticipating mass panic inside the walls of providers. »
An HMRC spokesman said: « Speculating on any changes to taxes carries risks and customers should carefully consider their options before taking out tax-free lump sums. »
An FCA spokesman said: « We are aware of this issue and are talking to HMRC. »
