Contribution refunds – what makes a genuine error?

The basic premise on contributions made to pensions is that once the money has gone in, you can’t get it out again until you reach retirement age (or earlier ill health or death). There are very few circumstances when exceptions can be made, and if a refund is made other than as permitted by HMRC, then it would be classed as an unauthorised payment with charges totalling up to 70% of the amount refunded.

There has been a recent ombudsman ruling - Mr K v Interactive Investor (II) – where Mr K sent in an employer contribution in the form of a cheque, realised he would be over his annual allowance, then tried to stop it. II told him their scheme administrator would cancel it, but it turned out this wasn’t possible as the cheque had been banked that day.

Mr K didn’t realise his request hadn’t been met until the monies left the company account, at which point it was too late for him to cancel the cheque - an option that would have been available at the time he made the request to II.

Once banked II’s scheme administrators stated they couldn’t make a refund as it would be an unauthorised payment. However the adjudicator directed II to liaise with HMRC, and HMRC did allow the refund.

The genuine error rules are far from clear. Guidance in PTM states that HMRC does allow refunds in circumstances where there was no intention to make a contribution, or the member was not entitled to the contribution. Examples of this would include where the member instructs their bank to cancel a direct debit, but the bank fail to act on this, or where an employee has left service but the employer contribution was not immediately stopped.

With Mr K the intention to make a contribution was clear – he completed a contribution form and sent it in with a cheque. So I can understand why II came out with the response it did. The ‘error’ in this case appears to be the fact that they told Mr K that they could stop the cheque when they couldn’t – and at a time when he still had the power to stop it himself.

With reducing annual allowances including the complexities of the tapered annual allowance and the confusion surrounding the money purchase annual allowance, it is little surprise that we have noticed an increase in the number of people who are asking for refunds on contributions.

What is clear is that exceeding your annual allowance alone (be that AA, tapered AA or MPAA) is not grounds for a refund. This also includes contributions paid under ‘bad advice’, for example where the tapered AA available has been miscalculated. Ignorance is no defence in the eyes of HMRC, and claims by members that they didn’t know the rules won’t wash.

One final point to remember; if an annual allowance charge does arise it may be possible to pay it from the pension scheme under scheme pays or voluntary scheme pays rules.

Senior Technical Consultant

Lisa is an Economics graduate who has been in the financial services industry since 2003. Prior to joining AJ Bell in 2014 she spent nine years working in senior technical and consultancy roles at a major SIPP and SSAS provider. Lisa is part of our Technical Team, responsible for providing regulatory and technical analysis to the business and outside world. She is also a regular speaker at adviser events.