RPSM09104820 - Technical Pages: Member benefits: Lump sums: Refund of excess contributions lump sum: Amount of payment

Amount of refund of excess contributions lump sum that may be paid

The amount that may be paid as a refund of excess contributions lump sum. This is referred to in the legislation as the available excess contributions allowance. This allowance is the amount of excess contributions paid in that tax year, less any earlier refund payments made (either in the same or an earlier tax year) to the member in respect of the contributions paid in that tax year from any registered pension scheme.

This is represented in the legislation by the following formula

RPC – MAR – ALS

RPC is the amount of relievable pension contributions paid by (or on behalf of) the member in the relevant tax year (other than by an employer, or paid by HMRC in the form of contracted out contributions, or any paid after the member reached the age of 75).

MAR is the maximum amount of relief to which the member is entitled in that tax year.

ALS is the total value of any refund of excess contribution lump sum(s) previously paid in respect of that tax year to the member.

It may be that the rules of a registered pension scheme provide for the payment of interest on refunded contributions. If the amount of the lump sum under the scheme rules is to be determined with reference to an interest rate or investment growth, and the interest or investment growth forms part of the lump sum, it can be treated as part of a refund of excess contributions lump sum for tax purposes, to the extent that it falls within the member’s available excess contributions allowance.

In other cases, the interest may be paid in addition to the lump sum. This may arise simply because of a delay in making the payment or may be a payment over and above the computed lump sum for some other reason. If it qualifies to be treated as a scheme administration member payment for tax purposes (see RPSM09104830) a payment of interest on top of the refund of contributions is an authorised payment.

In each case, it is a question of fact, based on the circumstances of the case, whether a payment is a lump sum or comprises a lump sum plus a separate payment for interest and it is possible that different pension schemes’ rules could lead to different results.

Example

In the tax year 2006/07, Ian paid contributions of £30,000 to a registered pension scheme. However his UK relevant earnings for that tax year turned out to be £25,000. So £5,000 of those contributions did not attract tax relief.

Under the scheme rules Ian can have a refund from the scheme.

To be a refund of excess contributions lump sum, the refund must be paid by 5 April 2013 (six years after the end of the 2006/07 tax year).

The scheme cashes in the investments purchased with Ian’s excess contributions, but their value is only £4,700. However, the scheme rules also allow the refund to include interest from the time the contributions were received to the time of repayment, as part of the lump sum. The interest rate to be used happened to be 3% and the excess contributions were received on 15 January 2007. When the scheme made the refund payment on 15 January 2009, the amount of the refund was £5,000. This did not exceed Ian’s excess contributions allowance, so the full amount qualified to be treated for tax purposes as a refund of excess contributions lump sum.