RPSM05101530 - Technical Pages: Contributions and tax relief: Member contributions: Refunds of contributions: Short service refund conditions

Conditions that must be met for a short service refund lump sum to be paid

A short service refund lump sum may be paid if

• the registered pension scheme making the payment is an occupational pension scheme,
• the member’s ‘pensionable service’ under the scheme was terminated before ‘normal pension age’ and the member is not entitled to a ‘short service benefit’ by virtue of section 71 of the Pension Schemes Act 1993. ‘Pensionable service’, ‘normal pension age’ and ‘short service benefit’ are defined in section 181(1) of the Pension Schemes Act 1993,
• the member has not previously been subject to a lifetime allowance test in relation to that scheme (not just a particular arrangement), and so there have been no previous benefit crystallisation events triggered under that scheme in relation to that individual. Whilst payment of some ‘authorised’ lump sum payments does not trigger a BCE, all such payments (except a refund of excess contributions lump sum) will (by definition) extinguish the member’s entitlement under the scheme. We therefore must be dealing with a situation where no benefits have been previously taken from the scheme by the member,
• the payment of the lump sum extinguishes the member’s entitlement to benefits under the scheme, except where the scheme is required to retain liability to provide protected rights benefits in accordance with DWP requirements, and
• the payment is made before the member reaches their 75^th birthday.

Amount paid

The maximum amount that can be treated as a short service refund lump sum for tax purposes is an amount equal to the total amount of the actual contributions paid by the member to the scheme.

Where the scheme is also paying interest or investment growth, see page RPSM09104740.

Where the scheme is a contracted out scheme, and is required to pay a Contributions Equivalent Premium (CEP) to HMRC to buy back the member into the State Second Pension (formerly SERPS)the scheme administrator may deduct the employee’s share of the CEP from the member’s contributions. Whether or not such a deduction is made, payment of a CEP by a registered pension scheme is an authorised member payment in its own right under the Registered Pension Schemes (Authorised Payments) Regulations 2006 [SI 2006/209].

Where such a CEP deduction is made from the member’s own contributions, then unless the scheme rules allow the inclusion of interest or investment growth as part of the lump sum, the amount paid to the scheme member will be less than the maximum which could have been treated as a short service refund lump sum under the tax legislation.