Important Pre-Budget Announcement

Taking of Pension Tax-Free Cash and cancellation rights

This note is intended for financial advisers and is not intended to be circulated directly to clients.

Prior to last year’s Autumn budget, the industry saw a marked increase in the number of clients who decided to take their available Tax-Free Cash, in response to rumours that the Chancellor may decide to either reduce or remove the amount of Tax-Free Cash available.

Industry reports show that many clients did this in the expectation that they could cancel the transaction (by completing a cancellation notice) if the anticipated changes were not actually made. A small number of 7IM clients did return cancellation notices, which were honoured at the time.

On 5 December 2024 HMRC issued Pension Schemes Newsletter 165, stating that the payment of Tax-Free Cash cannot be undone by a member exercising their cancellation rights and that the member’s lump sum allowance will not be restored.

This was contrary to what many industry professionals believed to be the case, and several professional bodies and firms therefore sought clarification from both HMRC and the FCA to determine the correct position. After a long period of deliberation, we have now received definitive guidance on the matter.

HMRC have confirmed in Pension Schemes Newsletter 173, issued on 25 September 2025, that their position remains unchanged.

On the same date, the FCA confirmed in a statement that their rules, specifically COBS 15.2, ensure that a right to cancel applies when a consumer enters certain specified contracts. In the context of pensions and retirement, specified cancellable contracts include a pension transfer contract and a contract to join a personal pension scheme.

They further stated that a contract allowing a person to take a Pension Commencement Lump Sum (PCLS), sometimes known as a tax-free lump sum, is not listed as a cancellable contract in COBS 15.2, so a contractual term allowing someone to take a PCLS does not of itself trigger cancellation rights.

As a result of these confirmations, cancellation rights will no longer be issued to members of the 7IM SIPP when they crystallise funds to take Tax-Free Cash or an UFPLS payment.

You will need to communicate to any of your clients that are considering taking Tax-Free Cash/UFPLS payments in advance of the budget, that these transactions are not reversible, and they should therefore think very carefully before proceeding.

The autumn budget this year is on 26 November. We are again expecting a large increase in the volume of benefit requests prior to the budget. We therefore ask that any benefit requests are sent in as early as possible, but in any event before 12 November to guarantee that they will be processed before the date of the budget. Forms must be fully completed, and you will also need to ensure that there is sufficient cash in the portfolio to make the requested payment. We can’t pay Tax-Free Cash in respect of any transfers in that haven’t been completed (i.e. all information received from the transferring scheme).

We have also been asked what would happen to the clients who did complete cancellation notices last year. The Investment and Savings Alliance (TISA) sought clarification from HMRC, who confirmed that “we will challenge alternative interpretations of the tax consequences of tax-free lump sums that have been returned after December 2024, when the position was made clear.”

We take it from this statement that any Tax-Free Cash reversals carried out before December 2024 will not be retrospectively challenged, and we do not therefore intend to revisit these cases.