Pension providers are urging the Government to relax rules preventing them returning tax-free lump sums to people who have recently decided to buy an annuity.
Chancellor George Osborne announced a radical shake-up of the retirement landscape on Wednesday which means anybody will be able to take their entire pension pot as cash from age 55. The change will come into effect from April 2015.
A number of providers have increased their annuity cancellation periods to give people breathing room when deciding whether or not go ahead with a purchase.
However, Aegon regulatory strategy manager Kate Smith says current HMRC rules prevent insurers putting tax-free lump sums back in savers’ pension pots.
She says: “When somebody buys an annuity, particularly through the open market option, if they have their funds with Aegon and they want to buy an annuity from someone else they take their tax-free cash with us, and then we transfer the money to the other provider.
“The individual may now have changed their mind after seeing the Budget reforms and decide they want to be put in the position they were beforehand.
“It is possible to cancel the annuity if you are within the cancellation period, but once you have paid out the tax-free lump sum it is very difficult to cancel that under HMRC rules because to put it back is an unauthorised payment.
“We are not talking about forever, we are talking about pipeline business.”
Legal & General pensions strategy director Adrian Boulding adds: “We have a number of individuals in a cooling off period and a number of them will change their mind.
“At the moment if the tax-free lump sum has been paid out it is not very practical to return it. We need a solution for people who change their mind and want to put their tax-free cash back into the pension.”