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 lump sum or a regular contribution - it doesn’t apply to every regular contribution paid, although some providers apply cancellation rights to every single contribution.
Tax relief is limited to contributions up to the higher of £3,600 per 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.
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 member 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.
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 member and/or their adviser.
Examples given by HMRC are:
An occupational defined benefit scheme can return a member’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.
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.