Refunds of contributions

Although the general rule is that once contributions are paid into a pension plan they can’t be refunded, there are a few circumstances when they can. Let's take a look at these.
Key facts

When can there be a refund of contributions?

  • when a plan is cancelled within the cooling-off period
  • where earnings don't cover individual contributions in a tax year
  • genuine error
  • defined benefit scheme where the individual leaves with less than 2 years' service.  

When can a contribution not be refunded?

  • when the annual allowance has been exceeded, but there are earnings to cover the contribution

Cancellation rights

When someone pays a pension contribution, they have a ‘cooling off’ period of 30 days during which they can cancel the contract and have the contribution returned. The contract is then treated as if it had never existed. This right exists only at the start of the contract, whether the first contribution is a single or a regular contribution - it doesn’t apply to every regular contribution paid, although some providers apply cancellation rights to every single contribution.

Not enough earnings

Tax relief on individual contributions is limited to the higher of £3,600 each tax year or 100% of earnings.

Of course, some people, particularly the self-employed, find it difficult to predict what their earnings are going to be in a tax year and so may end up paying more than their earnings. If the relief at source method has been used, the basic rate tax relief on the excess contributions that’s been received from HMRC must be returned to HMRC.

Whilst HMRC allows the net amount of excess contribution to remain in the plan, most providers will return the net contribution.

What if there's not enough annual allowance?

You’d think that if HMRC allows refunds of contributions greater than earnings that they’d allow contributions to be returned if the annual allowance is exceeded. But you’d be wrong.

Any contributions over the annual allowance available must remain in the plan and an annual allowance charge paid. This is a particularly common situation where the individual has a lower annual allowance because the money purchase annual allowance has been triggered or their annual allowance has been reduced because of high taxable income and they didn’t appreciate the consequences.

Genuine error

If there’s genuine error involved in the payment of contributions, the contributions can be returned. At first sight, this looks like a bit of a get-out-of-jail-free card – most people don’t deliberately set out to pay an annual allowance charge.

Unfortunately, the definition of genuine error is quite narrowly defined and boils down to errors made by 3rd parties rather than the individual and/or their adviser.

Examples given by HMRC are:

  • where a bank doesn’t act on an instruction to cancel a direct debit or standing order
  • where an employer deducts a larger employee contribution from an employee’s salary than they should
  • where an employer inadvertently pays some contributions after the employee leaves service.

HMRC Pensions Tax Manual - PTM146600 - Other authorised payments: genuine errors: “contributions” to a pension scheme that are not contributions 

Occupational schemes

An occupational defined benefit scheme can return an individual’s contributions if they leave with less than two years’ service. Occupational defined contribution schemes can also make these short service refund lump sums as they’re known but only if service is less than 30 days.

Note

The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. Also it may not reflect the options available under a specific product which may not be as wide as legislations and regulations allow.

All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.

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The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm is on the Financial Services Register, registration number 117672. It provides life assurance and pensions. Registered in England and Wales number 99064. Registered office: 55 Gracechurch Street, London, EC3V 0RL.