I took 25% tax-free out of my pension before the Budget. Can I refund this?

Before the Budget, I took a tax-free amount of 25 percent from my pension.

I was afraid I would lose the opportunity if the rules changed, but that didn’t happen and now I don’t know what to do with the money.

Can I restore it and if not, what are my options?

Tanya Jefferies from This is Money replies: Fears that the Chancellor would limit the amount of tax-free cash pension savers have from their pots have not been realized in recent years. Budget.

But many people have taken the precaution of withdrawing money in advance, despite warnings that they could miss out on future investment growth under the tax protection of a pension.

It’s worth noting that if you’ve taken out a defined contribution pension for an amount above your 25 per cent tax-free lump sum, you can only put aside £10,000 a year and still qualify for tax relief from then on on the contributions.

We asked a pensions expert to talk through what people who received tax-free amounts before the Budget can consider doing now.

Helen Morrissey, head of pensions analysis at Hargreaves Lansdown, explains five things you need to think about.

1. Try to cancel

If you recently submitted a request to your provider, see if you can undo the request.

Your provider may have a certain cooling-off period, so if you fall within that period, this may be an option for you.

However, there will be conditions attached; this will depend on your provider and your circumstances, including how and when you withdrew your tax-free money.

Helen Morrissey: Recycling rules have been introduced to stop people taking their tax-free money and reinvesting it in a pension for an extra bit of tax relief

2. Avoid recycling traps

If you want to reinvest the money in your pension, you must be aware of the rules for this, otherwise you risk being confronted with tax charges.

Recycling rules were introduced to stop people taking their tax-free money and reinvesting it in a pension such as a self-invested personal pension (Sipp) for an extra bit of tax relief.

There are a number of criteria laid down in the rules that must all be met before there is a violation: these are as follows.

– Tax-free cash is taken.

– Tax-free money withdrawn in the last 12 months is more than £7,500 (including other tax-free money withdrawn in the last 12 months).

– The contributions to pensions are considerably higher than expected. This applies to personal, employer and third-party contributions.

– The value of the premium increase is more than 30 percent of the tax-free money withdrawn. The recycling rules take into account contributions made in the tax year in which the tax-free money is withdrawn, as well as the two tax years either side of that.

– Recycling was planned by the member – the onus is on HMRC to prove it was a conscious decision.

If you are deemed to have broken the rules, you could face a 55 percent tax levy on the value of your tax-free money.

So any decision to reinvest in your pension needs to be carefully considered and it’s worth seeking advice from a financial advisor to ensure you stay on the right side of the rules.

3. Help a family member

It is important to say that these rules relate to contributions to your own pension and not to someone else’s. It is therefore possible that you can use the money, for example, to supplement the pension of a spouse or child and thus improve the financial resilience of your family.

You can reinvest up to £2,880 per year into the self-invested personal pension (Sipp) of a non-working spouse or child and they will receive tax relief of up to £3,600.

4. Invest or save

If you don’t choose one of the above routes, it’s worth considering what other investment options are available to you.

You don’t want to carry tax-free cash and then leave it in an easily accessible bank account, where it earns poor interest and you risk dipping into it regularly.

If you invest it in stocks and shares Isa, you can benefit from long-term investment growth and the income you receive can be enjoyed tax-free.

If you decide to put some of your money in a savings account, you can use a savings platform to ensure you get competitive interest rates.

If you can hold on to some of your money for a period of time (for example two years), you can also guarantee the interest rate at a time when the Bank of England is likely to make cuts. So it’s important to do that. do your homework on what is available.

> How to choose the best (and cheapest) DIY investment Isa

> View our best buy savings tables

5. Make gifts

Finally, from April 2027, the pensions will become part of your estate for inheritance tax purposes.

This is expected to change people’s behavior and encourage them to mitigate this burden by drawing income from their pensions rather than from other assets.

We could also see an increase in giving away money while they are still alive, rather than leaving it to someone after their death, and a renewed interest in annuities.

If you are considering giving gifts to a loved one, this may be a consideration, but you need to make sure you don’t give away too much and run out of cash later in life.