Refund of contributions - Royal London for advisers (2024)

What are cancellation rights?

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 single or a regular contribution - it doesn’t apply to every regular contribution paid, although some providers apply cancellation rights to every single contribution.

What if an individual doesn't have enough earnings?

Tax reliefon personal contributionsis limited to the higher of £3,600 each tax year or 100% of relevant UK earnings.

Of course, some individuals, 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.

When someone pays contributions greater than their relevant UK earnings (or £3,600, if greater) in a tax year, they can request a refund of the excess amount over their earnings (or £3,600, if greater). Known as a refund of excess contributions lump sum, this refund may be essential when an individual has gone over their tax relief limit and the scheme only accept contributions that attract tax relief.

Where the relief at source method has been used for receiving tax relief, the basic rate tax relief on the excess contributions that’s been received from HMRC must be returned to HMRC.

HMRC Pensions Tax Manual - PTM045000 - Contributions: refunds of contributions

Can someone have a refund of contributions if they've exceeded the annual allowance or money purchase annual allowance?

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 individual has a lower annual allowance because themoney purchase annual allowancehas been triggered or their annual allowance has beenreducedbecause of high taxable income and they didn’t appreciate the consequences.

What if there has been a genuine error?

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 third parties rather than the individual and/or their adviser.

Examples given by HMRC are:

• where a bank doesn’t act on an instruction to cancel a direct debit or standing order
• where an employer deducts a larger employee contribution from an employee’s salary than they should
• where an employer inadvertently pays some contributions after the employee leaves service

HMRC Pensions Tax Manual - PTM146600 - Other authorised payments: genuine errors: “contributions” to a pension scheme that are not contributions

What if an individual has short service in an occupational scheme?

An occupational defined benefit scheme can return an individual’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.

Can an individual get a refund if they opt out of their employer’s auto-enrolment scheme?

After being enrolled in a scheme, an individual has up to a calendar month where they can ask to leave the scheme (opt out). If the individual chooses to opt out after the one-month window, a refund of contributions will be determined by the rules of the pension scheme, and they’ll need to speak with their pension provider.