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Pension Drawdowns and Lump Sum Protection: Are You at Risk of an Unexpected Tax Bill?

  • Writer: Daniel Cattrall
    Daniel Cattrall
  • Jul 3
  • 2 min read

HMRC is now investigating individuals who claimed the full 25% tax-free lump sum — are you at risk?


If you’ve taken a pension drawdown in recent years and claimed the full 25% tax-free lump sum, you could now be under scrutiny from HMRC. Letters are being sent asking individuals to prove that they were entitled to the full tax-free amount — and in some cases, HMRC is demanding additional tax and penalties.


Many of these investigations relate to lump sum protection — particularly where individuals previously secured Fixed Protection 2016 (or similar protections) to preserve a higher tax-free entitlement. If further pension contributions were made after that protection was granted, it may now be invalid, potentially exposing individuals to unexpected tax liabilities.


Why This Is Happening

In the Spring Budget 2023, the Government announced the abolition of the Lifetime Allowance (LTA) — the limit on the total value of pension savings that could be built up without incurring an additional tax charge.


Before 6 April 2023, the LTA was set at £1,073,100. Any benefits taken above this threshold were subject to a tax charge of up to 55% for lump sum withdrawals.


Although the LTA charge was scrapped, several LTA-related rules remain, especially regarding tax-free lump sum entitlements. This has created confusion — and an opportunity for HMRC to revisit historic withdrawals where protection may no longer have been valid.


Who’s at Risk?

If you previously secured Fixed Protection or another form of lump sum protection — but continued making contributions (including employer contributions or through auto-enrolment) — your protection could have been lost.


That means the amount you took tax-free may have exceeded your actual entitlement, triggering an underpayment of tax.


What You Should Do Now

If you're concerned that your pension protection might have been breached, it’s important to act now — but carefully. Here’s what we recommend:


  • Review your contribution history: Go back to the date your protection was granted and check for any further contributions.

  • Check your lump sum drawdown: Assess whether your tax-free amount exceeded your valid entitlement at the time.

  • Seek expert advice: A specialist can help you assess your risk and decide the best steps to mitigate tax and avoid penalties.


How Tax Dispute Experts Can Help

At Tax Dispute Experts, we specialise in helping individuals facing HMRC investigations or tax disputes involving pensions and lump sum claims.


We can:


  • Review your pension and protection history.

  • Determine whether your lump sum was correctly calculated.

  • Handle communications with HMRC on your behalf.

  • Assist in making a full disclosure to HMRC where appropriate — helping to reduce penalties and interest.

  • In cases over six years old, we may argue that HMRC is out of time to raise an assessment.


Don’t Wait — Protect Your Position

If you’ve received a letter from HMRC — or simply suspect your lump sum protection may no longer be valid — now is the time to act. Pension drawdown errors can result in substantial tax bills, but many cases can be resolved quickly and fairly with the right guidance.


Contact Tax Dispute Experts today for a confidential consultation — and take control of your pension tax position before HMRC does.


 
 
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