Prior to 6th April 2012 it was possible to refund as a lump sum the non protected rights part of a short service occupational pension, one that has been running less than 2 years. Any protected rights part had to remain in the scheme until the normal retirement date.
These lump sums refund the contributions that you have paid into the scheme less a deduction for tax (not reclaimable for a non tax payer). There is no tax due on the refund.
Protected rights are the pension entitlements built up in an occupational scheme or Appropriate Personal Pension (APP) by the contracted out contributions in place of the SERPS & S2P. When a person is contracted out, part of their NICs is paid to their pension scheme rather than building as part of their second state pension (contacted in). These protected rights were kept separate from the main pension entitlement because restrictive rules applied when the pension payments commenced.
The pension rules are changing on 6th April 2012, meaning that it is now possible to refund a whole defined contribution occupational pension (but not an APP) as a lump sum and it is no longer necessary for the protected rights element to be held back in the scheme.
Schemes that have refunded lump sums prior to 6th April 2012 but have retained the protected rights part can now, if they wish, make secondary payments, where the scheme rules permit.
Some schemes have rules that prevent the protected rights being distributed. These rules would need to be amended before complete lump sums are distributed. Failure to do this would mean that the protected rights part of the lump sum could become liable to an unauthorised payment tax charge, basically another 20%. In such circumstances we should advise an enquirer to wait to claim the refund until their scheme has changed its rules to permit a full refund of both parts of the pension fund to be repaid, probably later this year.
These changes do not affect defined benefit (final salary) occupational pension schemes.
These lump sums are not to be confused with trivial commutation lumps sums, where a person has taken a lump sum of under £2000 from an occupational pension scheme.
This article is by TaxHelp for Older People (TOP) registered charity no 1102276, offering free tax advice to older people on incomes below £17,000 a year. The Helpline number is 0845 601 3321 or geographical 01308 488066