HMRC has cautioned pension providers against allowing savers to return their tax-free lump sums to their retirement accounts. 

Many financial firms have been offering a 30-day cooling-off period after savers request their tax-free allowance, permitting them to return the funds if they change their minds. However, HMRC now asserts that reversing such decisions and maintaining the tax-free status breaches its rules. 

In its recent pensions newsletter, HMRC acknowledged receiving inquiries from savers seeking to return their tax-free lump sums following the Budget announcement. However, it clarified that FCA-defined cooling-off periods do not apply in these cases. HMRC stated: "A tax-free lump sum payment cannot be reversed, and the member’s lump sum allowance will not be reinstated."

This development follows a surge in withdrawals of tax-free pension lump sums ahead of Labour Chancellor Rachel Reeves's first Budget on October 30, driven by concerns that the allowance might be reduced. Under current rules, savers can withdraw 25% of their pension pot tax-free upon reaching age 55, up to a maximum of £268,275. 

Before the Budget, reports indicated that ministers had consulted a major pension provider on the potential effects of reducing the limit to £100,000. Experts are now urging HMRC and the FCA to provide immediate clarification on the issue.

A source at one major pension provider, who did not wish to be named, said: “HMRC’s guidance on this has really frustrated us, and we intend to push back on it hard. 

“It is completely contradictory to what most pension firms do, which is in line with how we’ve interpreted FCA rules on this issue.

“Neither HMRC nor the Government confirmed anything to do with tax-free lump sums before the Budget, causing people to take theirs in a panic. After the Budget, they stayed silent on the issue of reversing withdrawals for five weeks. 

“If HMRC doesn’t change course, pension firms and our customers will pay the price, especially if people lose their tax-free allowances. 

“A sensible outcome would be a grace period where they turn a blind eye to people that have reversed their tax-free lump sum withdrawals.

“The Government or HMRC needs to stand up and offer clarity on this immediately.”

The FCA’s website states that consumers taking out “a contract to vary an existing personal pension scheme by exercising, for the first time, the right to make income withdrawals” are entitled to a cancellation period – yet it does not clarify if tax-free lump sum payments are included in this.

The apparent contradiction adds further uncertainty to a regulatory grey area. Some pensions providers, including Aegon and Aviva, do not offer a period in which customers can return a lump sum.

Another firm, Hargreaves Lansdown, previously allowed pension customers to reverse withdrawals of tax-free lump sums, but following HMRC’s newsletter it has suspended this offering, it told Telegraph Money.

Of the firms that do allow withdrawals to be reversed, Abrdn, Interactive Investor, Vanguard and Bestinvest confirmed with Telegraph Money that customers who put back their lump sum have not forfeited their allowance and will be able to remove it again tax-free when they wish.

The remaining firms that permit the reversal of a tax-free lump sum withdrawal within 30 days have not confirmed if this will affect future allowance.

Andrew Tully, of Nucleus Financial, said: “When a customer accesses their pension benefits for the first time, for example by taking drawdown, this is viewed as entering a contract to vary their existing personal pension scheme. This contract is cancellable.

“We are discussing this with industry bodies and other firms, and approaches have been made to both HMRC and FCA for more clarity on their respective positions.”