The government has said that members cannot undo tax-free lump sum withdrawals after a rush of savers tried to cancel the payments following the Budget.

In the run-up to the Budget, a large number of members, both advised and non-advised, withdrew some or all of their pension tax-free lump sums in response to press speculation that Labour was going to overhaul the rules at the Budget.

Citywire reported that many advisers were relying on platforms’ 30-day cooling off periods to request withdrawals of their clients’ tax-free lump sums, with the intention they would then cancel the requests in the window if the Budget did not change the rules.

The guidance given to advisers from Nucleus, James Hay, Curtis Banks and Abrdn was that they could exercise their cancellation rights within 30 days only if it was the client’s first drawdown.

However, in a newsletter, HMRC has now said that these tax-free lump sum payments cannot be undone and that ‘cooling off periods do not apply’.

The guidance read: ‘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 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.’

HMRC added that if the conditions for a PCLS 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 six months of the PCLS being paid, it is an unauthorised payment and the unauthorised payments charges will apply’.

‘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,’ HMRC said.

‘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.’

It is not clear what this guidance means for advisers who used platforms and providers’ 30-day cooling off periods for tax-free requests after the Budget. This could affect clients’ tax-free lump sum allowances.

It is understood that providers are speaking to HMRC about the guidance.