Contribution refunds explained

Once a contribution has been made to a pension scheme it is not usually possible for it to be refunded, however there are a few exceptions. As part of our Bitesize Technical series, Senior Technical Consultant, Joshua Croft explains the rules on contribution refunds.

• What conditions must be met for contributions to be refunded?
• What is an excess contribution?
• When can contributions be refunded for a genuine error?
• Can contributions be refunded when the annual allowance has been exceeded?

Watch the bitesize video now or scroll down to read through the key talking points.

Key insights on contribution refunds

Can pension contributions be refunded?

The basic principle when it comes to pension contributions is that once the money has gone in, it cannot be withdrawn until retirement age.

There are a limited set of circumstances where a contribution can be refunded. A refund that doesn’t fit within these rules would be classed as an unauthorised payment by HMRC.

Refunds for excess contributions

Refunds are allowed for personal contributions when they meet the ‘excess contribution’ condition. This is where the member has made contributions in excess of their UK relevant earnings for the tax year. Refunds can only be made once the tax year has ended, and the scheme administrator will need to see evidence of earnings for the tax year concerned.

The tax relief on any excess contribution must go back to HMRC, but it is down to the administrator whether the net contribution goes back to the member or remains in the pension scheme.

Refunds for genuine errors

HMRC allows refunds in very limited circumstances when a genuine error has occurred. This is only possible where there was no intention to make a contribution, or the member was not entitled to the contribution.

The most common example is where an employee has left service, but the employer contribution was not immediately stopped.

The genuine error guidelines do not cover circumstances where there has been a misunderstanding of the rules or where the member has simply changed their mind. If a contribution was made deliberately, but later information came to light that meant the member would not have chosen to make that level of contribution, this does not make it a genuine error and such contributions cannot be refunded.

Can contributions be refunded when the annual allowance has been exceeded?

Exceeding the annual allowance is not a reason for a refund. HMRC guidance clarifies that the annual allowance charge cannot be avoided by simply undoing a contribution. In fact, not only will the individual still be liable for the charge, if the contribution was refunded then they would likely also face an unauthorised payment tax charge.

Refunds under cancellation rights

If the pension scheme arrangement has been set up recently and the member is within their cancellation period (typically 30 days for pensions), then they can still exercise their right to cancel.

This would allow them to have a refund of any contributions made, but the arrangement would have to be closed and it would be as if the application had never been made. It would not be possible to have a refund of contributions and leave the scheme open.

More Bitesize Technical

Take a bite out of 'Scheme pays explained', the previous instalment of our pension contributions Bitesize Technical series, or start from the beginning, here.