In the lead-up to the latest UK Budget, you may have been concerned about potential changes that would limit the tax-free cash – known as a Pension Commencement Lump Sum (PCLS) – you can take from your pension.
According to MoneyWeek, withdrawals from the tax-free portion of savers’ pensions increased by 61% in 2024/25 compared with the previous year. This change is thought to have been largely driven by fears that the chancellor would adjust the tax treatment of PCLS.
We now know that this didn’t happen, meaning many savers who accessed their tax-free lump sum may have done so unnecessarily. There are likely those who want to reverse the decision so they can benefit from tax-free cash in the future.
In response, HMRC and the Financial Conduct Authority (FCA) released a statement about statutory cancellation rights for contracts and how these interact with PCLS.
Read on to learn how PCLS rules work and what happens if you change your mind after taking tax-free cash from your pension.
You can normally take the first 25% of your pension as a tax-free lump sum
The current rules, which didn’t change in the recent Budget, allow you to take up to 25% of your pension as a PCLS. This 25% is tax-free, up to the Lump Sum Allowance (LSA) of £268,275. Those with historic lifetime allowance protection may be entitled to a larger amount.
Withdrawals also count towards your Lump Sum and Death Benefits Allowance (LSDBA). This states that the total tax-free withdrawals and death benefits paid to you and your family cannot exceed £1,073,100. Those with historic lifetime allowance protection may be entitled to a larger amount.
You can take the PCLS in one go or in several smaller increments. Either way, once you’ve used the full 25% PCLS, further withdrawals from your pension will be taxed as income.
This poses a problem for those who accessed their pension before the Budget because they can no longer benefit from the tax-free lump sum in the future.
If you have already taken your tax-free lump sum and since decided you don’t need the funds, you might wonder whether you can reverse the decision.
Statutory cancellation rights allow a 30-day cooling-off period for certain contracts
To protect consumers, the FCA requires certain contracts to have a cooling-off period – usually 30 days. During this 30-day period, if you decide that you no longer want to enter into the contract, you can withdraw.
Where pensions are concerned, cancellation rights typically apply to taking out a new pension or transferring savings to a new provider.
In instances where cancellation rights apply, you can reverse decisions during the cooling-off period. The tax consequences of a decision can also be reversed. However, this is not normally the case where tax-free lump sums are concerned as they don’t qualify for cancellation rights.
The Financial Conduct Authority confirmed that cancellation rights do not automatically apply to Pension Commencement Lump Sums
In an announcement in September 2025, the FCA confirmed that “a consumer accessing tax-free cash in itself does not trigger cancellation rights under our rules.”
This means that, once you decide to access your tax-free lump sum, you don’t automatically have the right to reverse the decision.
Crucially, the tax outcomes resulting from taking a PCLS are also irreversible.
As a result, if you rush to access your pension, you will use some or all of your 25% tax-free lump sum. The withdrawal will also count towards your LSA and LSDBA.
Consequently, it could be more difficult for you to draw a tax-efficient retirement income in the future.
The decision may be reversible if the lump sum is part of another cancellable contract
While the current rules state that a PCLS may not be reversible, there are exceptions to this.
If the lump sum withdrawal is part of a larger contract that includes an action qualifying for cancellation rights – such as a pension transfer – you may be able to undo it.
Additionally, certain pension providers may offer voluntary cancellation rights for a PCLS, even if they are not required to do so by the FCA.
However, it’s important to note that HMRC confirmed if a provider offers voluntary cancellation rights, these apply to the action of taking a lump sum. The tax consequences are normally treated separately. This means that, even if you can reverse the decision and pay the savings back into your pension, you likely won’t recover your tax-free lump sum or any portion of your LSA or LSDBA.
It’s vital to keep this in mind when considering pension withdrawals and to check with your provider so you understand precisely what cancellation rights you have. Unless you require the wealth to fund your lifestyle, you may want to leave your savings in your pension.
It’s especially important to avoid making decisions based on speculation and media noise.
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Please note
This article is for general information only and does not constitute advice. The information is aimed at individuals only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate tax planning.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
