Can a client get their pension contributions back?

As the self-assessment deadline looms, we inevitably see an uptick in the number of queries about refunding pension contributions. However, once money has been contributed to a pension, it cannot usually be withdrawn until retirement or earlier death or illness. So, do the pension rules allow refunds at all?

The return of pension contributions is permitted in three limited circumstances:

1. Refunds under the “excess contribution condition”


2. Return of funds that were never intended to be a contribution or where the member was not entitled to a contribution


3. Short service refunds (for occupational schemes).

This article is concerned with the first two points.

Excess contribution condition

Personal contributions greater than clients’ relevant UK earnings are not eligible for tax relief and can be refunded after the end of the tax year concerned. The full list can be found here – but relevant earnings includes UK earned income from employment, a trade or partnership, but excludes income from pensions as well as savings, dividend and most property income.

The scheme administrator will require evidence of earnings to calculate the excess contribution amount to be refunded to the client and the excess tax relief due back to HMRC. Evidence will usually not be available until after the tax year end. Where earnings are confirmed as nil or very low, an underpin of £3,600 gross - known as the “basic amount” - is used as the earnings amount to determine the level of excess contribution.

Although the excess tax relief must be returned, the net contribution could remain in the pension if the scheme rules allow.

Deadlines

Refunds of excess contributions must be made within six years of the end of the tax year in which they were made. Pension administrators will usually only be aware of an excess contribution when the member or an adviser informs them. They must then return an information report (including the customer’s details), and repay the tax relief received, to HMRC, within 90 days of discovery.

After 90 days, late payment interest will become payable and will be calculated from the date the scheme received the excess tax relief, which could be six years ago. The current interest rate (as at January 2022) is 2.75%.

Genuine Error

The second category is referred to in the guidance as ‘genuine error’ but as this is a defined term in the guidance, it has a different meaning in layman’s terms, and confusion can arise.

HMRC define a genuine error as a pension scheme receiving funds that it was not entitled to, funds that were never intended to be a contribution, or a pension administration error outside of the member’s control.

Examples include an employer paying a contribution after an individual had left service or where a client’s bank failed to cancel a direct debit having received valid instruction on time.

If a client requests a refund because they’ve exceeded their annual allowance, revoked any lifetime allowance protection, were misadvised or they misunderstood the rules, this wouldn’t fall into the genuine error provision. Refunds made in these circumstances would be an unauthorised payment and attract very high tax charges.

A quick word on cancellation rights - these apply at product application level rather than to contributions. However, if a client exercises their application cancellation rights (usually 30 days for pension), the product is closed as if it never existed, and any pension contributions already paid will be returned.

This article was previously published by Professional Adviser