When can you have a contribution refund?
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.
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. 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 tax charges that could dwarf any annual allowance charge liability.
So, when can you have your money back?
- Cancellation period
If the pension has just been set up and a contribution is made at outset then it can be repaid within the cancellation period if the pension is closed.
- Excess contribution refund
This only applies to personal contributions, and allows a refund to be made where the member has made contributions in excess of their UK relevant earnings for the tax year. Most likely candidates for this are the self employed, those with fluctuating income, or someone who makes a contribution towards the start of the year based on their expected earnings but later gets made redundant, so earnings are lower than expected. 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. 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 fund.
“Excess contributions” are not contributions in excess of the annual allowance. “Excess” refers to contributions that are not entitled to tax relief. Technically speaking members can make personal contributions up to 100% of UK relevant earnings and receive tax relief – even if their earnings were £1million. What the annual allowance charge does is cancel out that relief on the amount above the available allowance, but the tax relief should always be claimed.
- Genuine error refunds
HMRC do 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.
Occupational schemes can also make short service refunds if the relevant criteria are met, but any other refunds made which do not fall into one of the above categories could face unauthorised payment charges totalling up to 70% of the amount refunded.
What is clear is that exceeding your annual allowance (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 is calculated by adding the excess amount to the member’s income for the year, and income tax applied at the appropriate rate. It therefore cancels out the relief they will have already received, so it isn’t penal like an unauthorised payment charge, and it may be possible to pay it from the pension scheme under scheme pays or voluntary scheme pays rules.