Returning tax-free cash

Just before Christmas I was asked by the Times newspaper to write an answer to the "Big Question" of the week -"should you be able to return your tax-free pension lump sum?"

This was following a story about HMRC being accused of causing harm to savers after it revealed those who rushed to use their tax-free lump sums before the Budget would not be allowed to reverse it and the Financial Conduct Authority's involvement.

Read the story online at the www.thetimes.com

If you cant see the online version, my answer is as follows:

Big Question is: should you be able to return your tax-free pension lump sum?

Although I have sympathy for those who have taken their tax-free cash early because they feared this option would have been taken away or restricted in last month’s budget, I do not think they should have the cash returned.

At first sight this may look like a simple case of a misunderstanding between the Financial Conduct Authority (FCA) who set out the rules for a 30-day cooling-off period, and HMRC which is responsible for implementing the tax rules. But it is more complex than this.

This is not a new thing. For the last 30 years, just before a budget, people have called concerned that government will abolish tax-free cash entitlement. So, what made so many people rush to action before the last budget?

The answer is, increased media coverage, changing behaviour and lack of proper analysis.

Since pension freedoms in 2015 many people see pensions as a pot of money they can spend as they wish and feel more empowered to take more control over their pensions, often following their own instincts and without financial advice.

I think pension freedoms are a good thing but one of the problems with acting instinctively and bypassing financial advice is a lack of proper analysis. I am not saying that advisers are always right, but most advisers were advising against making knee-jerk decisions. They pointed out any changes would affect everybody including politicians and turkeys don’t vote for Christmas! Advisers would have done calculations to show the advantages or disadvantages of taking cash so clients had solid facts on which to make decisions. Some people even insisted on taking their cash against the advice of their adviser.

In conclusion, I can understand why some panicked and subsequently regretted taking their cash early, but pensions are not like something you buy online only to ask for a refund when you change your mind. Pensions are a serious thing and enjoy generous tax advantages. Convert pensions into cash and income is one the most difficult decisions in personal finance and requires proper analysis and consideration. Therefore, it is only right that HMRC enforce the pension rules in a proper and consistent manner so people understand the importance of taking their time to make informed decisions.