HL UK Pensions Law Digest 29 September 2025

Welcome to our latest update, in which we cover: 

Cancellation of tax-free cash lump sums: tax consequences

• A warning about adverse tax consequences of reversing a decision to take a pension commencement lump sum (tax-free cash) or uncrystallised funds pension lump sum (UFPLS);

Abolition of lifetime allowance (LTA)

• Newsletter 173 promises further regulations to address outstanding issues in current legislation;

Reforming inheritance tax (IHT): applying IHT to unused pension funds

• A new inquiry by the House of Lords on aspects of the Draft Finance Bill;

Pensions Regulator (TPR): resilience in liability-driven investment (LDI) strategies

• TPR reports on good practice and areas for improvement;

Pensions Regulator (TPR): promoting innovation in pensions

• A blog from TPR introduces seven design principles to guide innovation in pensions;

Pensions Protection Fund (PPF): zero levy

• Welcome news that no conventional PPF levy will be charged for 2025/26;

Pensions dashboards: testing the MoneyHelper Pensions Dashboard

• A personal story of testing the new dashboard.

Cancellation of tax-free cash lump sums: joint update

HMRC and the Financial Conduct Authority (FCA) have issued parallel warnings (in HMRC Pensions Newsletter 173 and an FCA statement) about the tax consequences which may arise if a member seeks to return a tax-free lump sum to a registered pension scheme. The warnings are particularly topical, given a reported increase in individuals seeking to take tax-free lump sums before the Budget on 26 November 2025.

Key points are as follows:

• FCA rules require certain transactions to include cancellation rights (under the FCA’s Conduct of Business Sourcebook (COBS) rule 15.2.1). Specified cancellable contracts relevant to pensions include a contract to transfer a pension and a contract to join a personal pension scheme. Where a saver exercises the right to cancel a specified cancellable contract, any tax consequences of the transaction can be reversed.
• A contract allowing a person to take a pension commencement lump sum (PCLS) or uncrystallised funds pension lump sum (UFPLS) is not a specified cancellable contract under COBS 15.2.1. Equally, if a contract to transfer a pension or to join a personal pension scheme includes a right to a PCLS, the right to the PCLS will not be cancellable under COBS (even though the contract as a whole is cancellable).
• Pension providers may choose to give savers additional cancellation rights, beyond those required by COBS. However, the tax consequences of taking a PCLS or UFPLS cannot be reversed, even if the saver exercises a “voluntary” cancellation right.
• Tax consequences of taking a PCLS or an UFPLS include:
  • A reduction in the saver’s remaining lump sum allowance (LSA) and lump sum death benefit allowance (LSDBA); and
  • An unauthorised payments charge if the conditions for being a PCLS or UFPLS are not met (even if the PCLS or UFPLS is returned to the scheme). For a PCLS, this means that the member must become entitled to a “relevant pension” under the same scheme up to 12 months before or six months after the PCLS is paid.
• Pension providers which offer “voluntary” cancellation rights when taking a PCLS or UFPLS should ensure that members understand that the tax consequences of taking the lump sum cannot be reversed.

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Abolition of lifetime allowance: HMRC newsletter 173

HMRC’s most recent pensions newsletter includes an update on legislation concerning the abolition of the lifetime allowance (LTA) on 6 April 2024 (“L-Day”). HMRC is drafting minor technical updates to the legislation, with regulations expected in force in early 2026 but with retrospective effect from L-Day.

Key amendments include ensuring that:

• Lump sums from an overseas pension scheme to a UK resident continue to be treated similarly to equivalent tax-free (or partially tax-free) lump sums from registered pension schemes;
• In relation to trivial commutation lump sums, the valuation of a member’s relevant crystallised pension rights is consistent with pre L-Day rules;
• Scheme-specific pension commencement lump sums are calculated as intended;
• Stand-alone lump sum values may be transferred to a receiving scheme; and
• Enhancement factors are treated consistently with pre L-Day rules.

HMRC anticipates that the amendments will not impact the vast majority of pension savers.

The draft regulations have not yet been issued. HMRC plans to explain how to provide feedback on the draft legislation in future newsletters.

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Inheritance tax and pensions: House of Lords inquiry

The House of Lords Finance Bill Sub-Committee has launched an inquiry on the Draft Finance Bill 2025-26. The Sub-Committee will inquire into two areas of the draft Bill:

• Reforming inheritance tax (IHT): unused pension funds and death benefits; and
• Reforms to agricultural property relief and business property relief.

The Sub-Committee would like to hear from taxpayers, advisers, relevant organisations and any other interested parties. Written evidence is requested by 5pm on 7 October 2025.

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Pensions Regulator: market oversight - preparing for LDI risk

The Pensions Regulator (TPR) has issued a Market oversight report, which addresses how well pension schemes are prepared for liability driven investment (LDI) risk and what trustees need to know. As a reminder, in April 2023 and in the aftermath of the disruption to the gilts market in late 2022, TPR issued guidance for schemes on managing LDI-associated risks.

Key points include the following.

Market developments

• The size of the LDI market has halved since 2021 (from about £1.5 trillion to about £0.7 trillion by March 2025).
• The duration of LDI exposure has also reduced significantly from about 20 years to 13 years, driven by higher interest rates and the passage of time.
• Daily volatility in leveraged LDI assets has declined by over 50% compared to late 2021 levels.
• LDI managers have improved minimum resilience by increasing interest rate buffers to about 300 basis points, compared to about 150 basis points prior to October 2022. (TPR’s 2023 guidance expects LDI arrangements to operate a market stress buffer of at least 250 basis points.)
• Many schemes have adopted pre-agreed instructions specifying the assets to be sold if needed to raise cash. TPR is concerned, however, that rigid structures may lead to asset sales without consideration of market conditions.

Where continued improvement is needed

TPR has identified two areas in particular where greater focus is needed.

• Diversification of collateral assets: trustees should be aware of concentration risks if pension schemes attempt to sell similar assets simultaneously during stress events. This risk may be mitigated by:
  • Diversifying collateral assets, to increase the sources of cash and to reduce liquidity bottlenecks in particular markets; and
  • Developing more flexible liquidity frameworks which allow market conditions to be taken into account.
• Resilience testing: trustees should periodically test the resilience of their LDI processes, including to ensure that interest rate buffers can be replenished within five working days.

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Pensions Regulator: promoting innovation

The Pensions Regulator (TPR) has issued a blog by Dr Marion Lean, Head of Innovation and Design Practice. The blog reports on TPR’s recent second innovation event, which contributed to the development of seven design principles to guide innovation in workplace pensions, broadly concerning:

• Saver-centred;
• Impact and evidence;
• Responsible use of technology;
• Transparency, trust, simplicity and clarity
• Inclusion;
• Sustainable and future-looking;
• Continuous feedback and iteration.

TPR has yet to finalise the wording of the principles. TPR intends to apply the principles to its own work and encourages the pensions industry to do the same.

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Pension Protection Fund: zero levy for 2025/2026

The Pension Protection Fund (PPF) has announced that it will not charge a conventional PPF levy for 2025/26. The announcement follows changes to the levy provisions made by the Pension Schemes Bill, which will allow the PPF greater flexibility to set the levy at zero and to reinstate a levy in future if circumstances change.

The PPF reports that the zero levy will save defined benefit (DB) schemes £45m this year.

The PPF has commented that it will continue to prioritise the government’s consideration of indexation of PPF compensation, and that moving to a zero levy will not affect this work.

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Pension Dashboards: testing the MoneyHelper Pensions Dashboard

The Pensions Dashboards Programme (PDP) has issued a blog and a video by Chris Curry, Principal of PDP, reporting on his personal experience of testing the MoneyHelper Pensions Dashboard. Interesting points include:

• The process from verifying identity (through a previously-created GOV.UK One Login account) to viewing specific pension information took less than five minutes.
• Pension information can be presented in different ways, including by giving an estimated retirement income in the year of reaching State Pension age, and showing how this amount may vary based on pension starting dates.
• The initial phase of testing with industry experts is helping to validate core functionality, while identifying areas which require further improvement.
• The critical test for dashboards still lies ahead, in the form of comprehensive consumer testing. The first phase of this is expected to last around 12 weeks and to involve up to 15 schemes already connected to the dashboards architecture.

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Authored by Jill Clucas.