RPSM09104730 - Technical Pages: Member benefits: Lump sums: Short service refund lump sum: Amount of payment

Amount of the short service refund lump sum

To be treated as a short service refund lump sum the amount actually paid as a lump sum must not be more than the total amount of the actual contributions paid by the member to the scheme. Investment growth

Scheme rules may provide for investment growth to be included in the refund of contributions. An amount bringing the total payment up to the short service refund lump sum limit can be treated as part of the short service refund lump sum for tax purposes. Any excess may qualify to be treated as a scheme administration member payment.

Example

In a contracted-out scheme, the scheme administrator deducts the employee’s share of the Contributions Equivalent Premium (CEP) from the amount to be refunded, where the scheme is required to pay a CEP to HMRC to ‘buy back’ the member into the State Second Pension (formerly SERPS).

The payment of a CEP by a scheme administrator is an authorised payment under the Registered Pension Schemes (Authorised Payments) Regulations 2006 (SI 2006 no 614).

Because some of the contributions have been used to pay the CEP, the amount of actual contributions available to be refunded is less than the HMRC limit of the amount of contributions paid by the member to the scheme.

Under the scheme rules, investment growth can be included in the amount refunded to the member on leaving service within two years of joining the scheme.

The member had paid contributions of £13,000. The CEP is £1,000. The amount of the contributions to be refunded is therefore £12,000. The amount of investment growth on those contributions over the period was £800. The total amount refunded to the member is £12,800, and because under the scheme rules the investment growth is part of the lump sum payment, not an additional payment of interest, and also because it is within the limit of £13,000 for that member, this qualifies for tax treatment in its entirety as a short service refund lump sum.

The first £10,800 is taxed at the rate of 20% and the balance of £2,000 is taxed at the rate of 40%. The scheme administrator is liable for the tax charge.