Our statement explaining how FCA rules on cancellation rights, to complement an HMRC statement about how tax legislation applies to tax-free pension lump sums.
On 25 September 2025, HMRC published newsletter 173[1] which explains how:
- tax legislation applies to tax free lump sums and
- the tax implications when lump sums are returned to pensions
To support firms' understanding of that statement, we are providing an explanation of how our existing rules on cancellation rights operate in these scenarios.
Under our rules, consumers have the right to cancel certain contracts, typically within 30 days of entering the contract, if they change their mind.
However, the right to cancel does not arise in all circumstances. A consumer accessing tax-free cash in itself does not trigger cancellation rights under our rules.
Our rules do not exempt firms from HMRC requirements. This means firms should be mindful how they structure their contracts in light of the interaction between HMRC requirements and ours.
FCA rules: the right to cancel
Our rules, specifically COBS 15.2, ensure that a right to cancel applies when a consumer enters certain specified contracts. In the context of pensions and retirement, specified cancellable contracts include a pension transfer contract and a contract to join a personal pension scheme.
A contract allowing a person to take a Pension Commencement Lump Sum (PCLS), sometimes known as a tax-free lump sum, is not listed as a cancellable contract in COBS 15.2 so a contractual term allowing someone to take a PCLS does not of itself trigger cancellation rights.
Taking a PCLS
We do not tell firms how to structure PCLS in their contractual arrangements with customers. This is a design choice for firms. In making that choice, firms should consider the interplay with tax legislation.
Taking a PCLS and designating funds for drawdown are two separate activities. They do not have to take place at the same time. Designation to drawdown can happen up to 12 months before or 6 months after a PCLS is taken, or without a consumer choosing to access a PCLS at all. Also, PCLS can be taken with an annuity.
We understand that firms have adopted varying approaches to structuring PCLS. For example:
- The original pension contract may already enable a consumer to take a PCLS, designate funds to drawdown and make income withdrawals from the drawdown fund, all without needing to establish a new contract or vary a contract.
- A firm may choose to give effect to PCLS in a separate contract from the contract giving drawdown or annuity options. Or give effect to PCLS in the same contract but limiting cancellation rights to the drawdown/annuity options.
In such cases, a right of cancellation does not arise for the PCLS.
Or a firm may have chosen to deliver PCLS as part of a:
- contract to join a pension scheme
- pension transfer contract
- contract to vary an existing pension scheme the first time a consumer exercises an option to make income withdrawals
Unless limited to the activities expressly specified in our rules, the firm will be treated as voluntarily adding cancellation rights in relation to other rights arising under that contract, including those relating to PCLS. Our rules do not prevent a pension provider from choosing to offer cancellation rights in their contracts in additional circumstances beyond those set out in our rules. Firms will need to consider the implications of tax legislation when voluntarily offering cancellation rights.
Where a consumer has taken a PCLS and then wishes to return that money to a pension, tax legislation will affect what firms and their customers are able to do and whether a consumer will incur a tax charge. HMRC’s newsletter[1] provides more information.