Martin Jones, technical manager at AJ Bell
I am not envious of financial advisers.
With Autumn Budget 2025 on the horizon, there seems to be a significant amount of concern about rumoured tax-free cash reductions, and I’m sure advisers will have fielded plenty of phone calls from worried clients. Certainly, on the provider side, we have seen an increase in demand for lump sums ahead of this year’s main fiscal event.
Some perspective is helpful in times like this, and all four times the lifetime allowance – and therefore tax-free cash – was reduced in the last 20 years, we had over a year’s notice. No overnight changes.
The respective governments (of all colours) also introduced forms of protection each time so that pension savers could keep the old limits – with strings attached, of course. While in theory the rules could change immediately, that would be very unusual. Of course, past performance is no guarantee etc.
On top of that, it would be tremendously unpopular in political terms, again making it unlikely. There is also the question for clients of what they would actually do with the cash once they’d received it. Regardless, many clients will still be insistent they want to take it now.
Lurking in the background, there is also the spectre of the April 2027 inheritance tax (IHT) changes, whereby any unused pensions on death will be assessable for IHT. That’s still about 18 months away, but in financial planning terms, that’s no time at all.
So, while there may be some instinctive reactions amongst your clients about the Budget rumours, there may also be valid planning reasons to extract funds from a pension with one eye on the IHT changes.
On top of that, we’ve had the situation with lump sum cancellation rights rumbling on over the last year. In December 2024, HMRC set a cat amongst us industry pigeons by publicly stating that tax-free lump sums cannot be cancelled. This came on the back of perceived questionable use of the cancellation process to hedge bets ahead of rumoured tax-free cash cuts in Autumn Budget 2024.
The FCA rules – from which cancellation rights originate – do not specify lump sums as “cancellable contracts”. A contract to vary a pension scheme by making the first designation to income drawdown is cancellable, however. A lifetime annuity contract is also cancellable. And under the tax legislation, a tax-free cash lump sum cannot be paid unless the member becomes entitled to a form of pension, such as income drawdown or lifetime annuity (or scheme pension) – they are inextricably linked.
Many providers were of the not-unreasonable belief that cancelling drawdown or an annuity also meant cancelling the lump sum. Therefore, there was some angst and uncertainty about how HMRC’s newly-declared view would play out.
Following pushback from the industry, HMRC agreed to review the stance. In September 2025, they confirmed in parallel with the FCA that the analysis had not changed – lump sums are not cancellable by right. Providers can offer cancellation rights voluntarily, but even if the lump sum is returned it will still use up Lump Sum Allowance (LSA) and Lump Sum and Death Benefit Allowance (LSDBA).
And in October 2025, they confirmed that a lump sum taken after a pension transfer will not automatically be cancelled if the transfer itself is cancelled. They also intimated that they would not re-examine cancellations before December 2024. Again, though, a lot to explain to clients.
Despite these clarifications, there is still uncertainty about lump sums paid within 30 days of a new pension policy being established. It’s unclear if such a lump sum would automatically be cancelled or whether it’s still deemed to use LSA and LSDBA.
In fairness to HMRC, they are working with rules set by the FCA – a body with a different remit and approaches to them. If anything is to come of this, it will hopefully highlight that the cancellation rules must be improved. It seems strange that one of the single biggest retirement decisions cannot be reversed.
Circling back to the increased demand for lump sums, a challenge for advisers may be in identifying how their preferred providers approach the topic of cancellations. Different providers will have different contractual arrangements, meaning some may voluntarily allow lump cancellations and others might not. You may find there is a patchwork of approaches.
So, certainly some choppy waters to navigate, and advisers will need to use all tools available to them – compasses, sextants, barometers… crystal balls. One thing’s for sure though, clients with financial advisers will have a much better chance of getting to safer shores than those who don’t.
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