Retirees cancel tax-free lump sum withdrawals after no change to budget line

People who, out of fear of changes, submit requests to withdraw money from their pension tax-free in last month’s budget companies are now asking to reverse their decision, companies have said i.

Pensioners are allowed to withdraw 25 per cent of their pension savings, up to a value of £268,275, in a lump sum tax-free, before taking the rest as taxable income.

In the run-up to last month’s Budget, there were calls from several think tanks, including the Institute for Fiscal Studies, for the Chancellor to reduce the limit to £100,000, and speculation that changes were on the way.

Ahead of the Budget, it was reported that more and more pensioners were contacting providers to withdraw their tax-free money, while those working in the wealth and pensions sector said this i they received phone calls and emails on this subject ‘daily’.

But in the end, no changes were made to the rules.

Alice Haine, personal finance analyst at Bestinvest, said the provider more than doubled the number of withdrawal requests in October compared to the same month a year ago, but some of their customers had since reconsidered their position and canceled their withdrawal requests.

She said: “The increase in pension withdrawal requests was mainly driven by people aged 55 and over accessing their 25 per cent tax-free cash early, fearing the rules would change and stop them using the money to clear mortgagespay off debts or achieve other important life goals.

“As the 25 percent tax-free flat rate ceiling in the budget remained untouched, some Bestinvest customers have since reconsidered and canceled their requests.”

Bestinvest customers have a 30-day cooling-off period for the first ‘crystallisations’ – a term used for the first payment of a pension – but those who have previously crystallized part of their pension have no notice period.

Many providers have similar rules, although some do not allow tax-free cash to be returned after it has been withdrawn.

Other pension providers also said they had received requests from customers to return cash.

Helen Morrissey, head of pensions analytics at Hargreaves Lansdown, said the platform has seen customers change their minds and want to reverse their decision.

She said: ‘There is always concern that speculation can lead to people making knee-jerk reactions that they later regret.

“Pensions are a long-term game, and policies must be developed with a long-term approach so that people can plan for their future with certainty and without fear that their hard work will be undone by changes further down the line.”

Tom Selby, director of public policy at provider AJ Bell, said they have seen a “handful” of cancellation requests in recent weeks.

He emphasized that those who regret their decision still have time to go back, if the request was made less than 30 days ago.

To avoid future uncertainty, Mr Selby said AJ Bell would like to see the Government commit to a tax freeze on pensions, promising not to change tax benefits or tax-free entitlements.

Speak with ihe said: “Financial Conduct Authority (FCA) rules mean it is possible to reverse the decision to withdraw your tax-free cash, provided it was the first time you had accessed your pension, although many will not be aware of this and there is a limited 30 day period to put the toothpaste back in the tube.

“Anyone who has taken their tax-free money and now regrets that decision should urgently contact their pension provider to see if they can change their mind.”

Pros and cons of giving back your tax-free money

According to Ms Haine, giving back your tax-free money has many positives, but also some negatives.

Positives

One of the biggest challenges people face when they retire is running out of money.

By investing the money in your pension rather than taking it as a lump sum, the funds can grow in value for longer and there is a greater chance that the tax-free amount they can access at a later date can be even greater .

If you withdraw 25 percent of your pension tax-free earlier than planned, you will have to pay tax on further withdrawals at your usual tax rate.

Disadvantages

If you planned to use the lump sum to pay off a mortgage or pay off debt, paying the money back takes away the opportunity to reduce your monthly payments or pay off your debts completely.

Household budgets have been severely strained in recent years and paying down heavy debt could benefit those hit by high interest payments and looking to pay down debt as they get closer to retirement.

A lump sum can also be useful to finance the early years of retirement, when people tend to be more active than in the later stages of life. The money could be used to finance travel or to fill the gap between when someone stops working and when someone receives their state pension.

It is important to remember that you can still withdraw the money after returning it so that the above disadvantages can be avoided.