Cancellation or reversal of pension commencement lump sum payments

Autumn 2024 Budget pre-Budget speculation

In the run-up to the Autumn 2024 Budget, a great deal of press speculation led to some pension scheme members deciding to take some/all of their pension commencement (tax-free) lump sum (PCLS) entitlement, in fear of the fact that there would be some form of new limitation being applied to these by the Chancellor. In the end, no changes were made to PCLS in that Budget and some of those who had taken PCLS requested that the payment be reversed and the monies returned to the pension scheme environment from which they had come, by exercising cancellation rights.

What happened next?

Whilst Dentons Pensions (Dentons) was not affected by scheme members taking this action, many pension providers were, and it soon become clear through press articles and HM Revenue & Customs (HMRC) Newsletters that, once taken, PCLS payments could not be reversed and any lump sums taken would have to be tested against the member’s available Lump Sum Allowance at the time the lump sum was taken. The Lump Sum Allowance which was used up could not be restored by trying to reverse the PCLS payment. In addition, anyone trying to pay the PCLS monies back into their pension scheme was bound by HMRC’s complex rules around “recycling” tax-free lump sums as pension contributions.

Why wasn’t it clear that all of this was going to be problematic?

In relatively simple terms, certain Financial Conduct Authority (FCA) regulated products (such as SIPPs) carry cancellation rights with them, meaning that clients can cancel the product/contract within certain timescales and move forward as if the product/contract had not been established. There was a belief within the wider pensions industry that PCLS was subject to the FCA’s cancellation rules in relation to altering a contract and going into drawdown and hence could be cancelled/reversed.

Unfortunately, this appeared to be at odds with HMRC interpretation of the tax legislation (the Finance Act 2004) which governs the tax treatment of pension schemes. HMRC’s position is that PCLS payments cannot be reversed by exercise of any cancelation rights.

Where do we stand now?

On 25 September 2025, and in advance of the Autumn 2025 Budget, HMRC issued a Newsletter, in which it reiterates its position on the subject. It also references a statement by the FCA issued in parallel on the same topic. Whilst the FCA’s rules around cancellation rights and HMRC’s interpretation of the tax legislation are very complex, the strong message from both appears to be that it is not possible to cancel/reverse PCLS payments. HMRC’s Newsletter 173 states (amongst other things):

“If an action has resulted in a tax consequence, and an attempt is made to reverse the action, normally the resulting tax consequences cannot be reversed. The tax consequences will normally stand.”  

Commentary

It is unfortunate that it has taken many months for clarity to be provided about this complex area, but it is welcome that both HMRC and FCA have issued statements in parallel which appear to take the same stance.

Whilst many of our advisers and clients may be keen for us to carry out PCLS calculations and crystalise benefits pre-Budget, wait to see what happens, and then decide whether or not to exercise cancellation rights after the Budget, the announcements from HMRC and FCA seem to make clear that the exercising of cancellation rights post-Budget will not have the effect of reversing PCLS payments, even if the lump sum has not been paid. Therefore, we would urge caution in taking any action which is based on pre-Budget speculation, and remember that, once paid, the funds will be in a less tax-advantageous environment.