RPSM09104830 - Technical Pages: Member benefits: Lump sums: Refund of excess contributions lump sum: Interest on payment

Interest paid on the refund of excess contributions lump sum

The definition of a refund of excess contributions lump sum limits the amount that can be treated as such a payment to the amount of actual excess contributions made by the member.

But a registered pension scheme’s rules may provide for interest to be paid to the member in respect of these refunds. In some cases, the payment of suchinterest is treated under the scheme rules as being additional to the refund of excess contributions lump sum payment itself.

Should a scheme wish to pay interest in circumstances where the interest is not part of the lump sum itself, such interest may be treated as a scheme administration member payment.

A scheme administrator member payment is a payment for the administration or management of the scheme. Such payments should be made on an arm’s length, commercial basis. So any interest paid by a scheme on a refund of excess contributions should be no more than a reasonable commercial rate if it is to be a scheme administration member payment. Any excess will be an unauthorised member payment and taxed accordingly – see RPSM04104020 and RPSM04104040.

Interest payments associated with a refund of excess contributions lump sum that meet the definition of scheme administration member payment taxable under section 369 Income Tax (Trading and Other Income) Act 2005 (formerly Case III Schedule D).