HM Revenue & Customs has confirmed refunds from pension schemes ordered by the Financial Ombudsman Service, following a case of "bad advice" or "mis-selling", will be classed as unauthorised payments.
A new chapter in the Registered Pension Scheme Manual (RPSM), issued by HMRC today, outlines in what circumstances refunds can be made from pension schemes following genuine administrative errors, without being classed as unauthorised payments.
The 14-pages of guidance confirms refunds to members or schemes can be made, and no reporting by the scheme administrator is necessary, providing the payment in question is:
- Made in genuine error, which means there was no intention to make a payment to that extent, or at all
- And the erroneous payment is spotted by the recipient of the payment or someone involved with the management of the scheme,
- And the error is rectified as soon as reasonably possible
HMRC has provided examples of where refunds would be allowed, including repaying additional employee contributions to an occupational scheme which are deducted by an employer by accident, and where a pension commencement lump sum is overpaid to a member providing the excess is returned to the scheme immediately.
In addition where a member is being paid a pension in instalments and the scheme overpays the member by less than £250 in total, HMRC says it will not take any action if the scheme either decides not to pursue the overpayment, or where action to recover the money is unsuccessful.
It admits although this money would be classed as an unauthorised payment “for its own reasons of cost administration, under its collection and management powers, HMRC will not seek to collect the tax that, in strictness, is due in respect of the unauthorised payment”.
However it says in cases where a pension might have been “mis-sold or purchased under a misapprehension” and under the recommendation of the FOS or Pensions Ombudsman, a refund of contributions is made to the member, this would count as an unauthorised payment unless it was a short service refund lump sum, or a refund of excess contributions lump sum.
Although HMRC says refunds made by order of the FOS would not be subject to scheme sanction charges, it warns any agreements made between a scheme and one of its members to refund contributions because the member is "dissatisfied with the administration of the scheme or has a change of mind on investment strategy", will also be subject to an authorised member payment.
And Andrew Tully, marketing technical manager at Standard Life, says while it mentions the member unauthorised payment, it can also be assumed the member surcharge, which is another 15% charge would also apply if the refund is valued at more than 25% of the fund.
He says: “While the member would have received tax relief on the way in, and perhaps also some growth in the fund, the guidance does appear to disadvantage them - it would have seemed more sensible to put them back in the position as if they had never contributed in the first place, which is what they seem to be doing in the other situations.”
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