If the reservation used only banked points, then the points returned remain in the 2007 UY, and cannot be unbanked back to 2006, nor banked again into 2008. They can only be used during your 12-month 2007 UY, (Oct 1, 2007 thru Sep 30, 2008), and if not used during that timeframe, they would expire. (Be forfeited).
If the reservation you made used a combination of current year AND banked points, and you cancel, then make sure MS returns current year points and leaves the banked points for the remaining reservation.