People who took PCLS before the Budget and returned it using "cancellation rights"
SA96
Member
Unless I'm mistaken, are HMRC saying that these clients shouldn't have been able to return their tax-free cash, using cancellation rights? If so, what happens to these clients?
Tax treatment of tax-free lump sums paid back into a registered pension scheme
We are aware that some schemes are being asked by members how they can return payments of pension commencement lump sums (PCLS) or uncrystallised funds pension lump sums (UFPLS) that they took because of speculation about changes that might occur affecting their pensions in the 2024 Autumn Budget.
Some pension contracts and policies allow for a cooling-off period. Under Financial Conduct Authority (FCA) rules, cooling off rights apply to the purchase of a new product only, for example the purchase of an annuity. The payment of a PCLS or UFPLS is not a new product, which means that cooling off periods do not apply to those payments.
If the conditions for making a payment of a PCLS or UFPLS are not met, for example if a member is not entitled to a relevant pension such as a pension, a lifetime annuity or putting funds into drawdown, within 6 months of the PCLS being paid, it is an unauthorised payment and the unauthorised payments charges will apply. Read the Pensions Tax Manual: PTM063210 and Pensions Tax Manual: PTM063300 for further details.
The payment of a tax-free lump sum cannot be undone and the member’s lump sum allowance will not be restored. The lump sum must be tested against their lump sum allowance at the time the lump sum was paid from their pension scheme.
Unauthorised payments charges may apply if contributions to pension schemes are made out of tax-free lump sums and the conditions for the recycling rule are met._
Comments
Maybe I am joining too many dots, but does it read like the return of funds will be treated as a contribution and subject to recycling rules?
Otherwise I assume the pension provides will need to send the cash back to the member. Spoke with a SIPP provider the other day and lots of their clients are using the cooling off to return the lump sum so we'll see if there is push back about this. Given the chat about this pre budget, would probably have been useful for HMRC to engage before the budget, not announce it now...
If HMRC enforce the unauthorised payment tax charge on recycled PCLS payments, this will result in lots of unhappy people!
HMRC have created a mess!
In the COBS rules (15 Annex 1 1.5R), there is a specific requirement about adding a time period to replace the lack of cancellation rights.
But if a firm does this, they simply hold the application form for that period, and it wouldn't have resulted in the PCLS being paid (because you can't technically cancel that).
When providers allow it, they are usually doing so to correct an error i.e. it isn't anticipated. But I know some providers were still allowing this for the budget scenario. We were making specific enquiries with each provider every time, based on our understanding that there isn't a right to cancel.