Over-contributed to PP - darn!

pharmer9

In anticipation of forthcoming pension nirvana, I made a lump sum payment of £20k to my PP in March '15, well within the £40k annual allowance (I thought).
Except, as I have no EARNED income, I now see that my annual allowance is actually £3,600 gross
Is it ever possible to retrieve such overpayments?
My PP account summary is currently showing that I have "£5,050 Tax Due". Presumably this is the 20% tax with which that HMRC is grossing up my payment (to which I am not entitled) (there is also a small monthly standing payment also which makes up the difference to a true 20%).
From my reading, it appears that if the over-contribution stays in my PP I will have a tax liability. But tax on what, and paid as what / where?
BTW - I realise I can possibly get some relief by applying part of the over-contribution to previous years, but let's leave that out of the equation for now.
Any thoughts on how this will all shake out?
Thanks

dunstonh

Is it ever possible to retrieve such overpayments?

If you are within the cancellation period yes. After that, normally the answer is no. You can enquire and see if they will but I would expect the answer to be no.

From my reading, it appears that if the over-contribution stays in my PP I will have a tax liability. But tax on what, and paid as what / where?

The contribution you made is allowed. However, only £3600 is eligible for tax relief. So, you will have to repay the tax relief on the excess amount.

BTW - I realise I can possibly get some relief by applying part of the over-contribution to previous years, but let's leave that out of the equation for now.

That wont work. You only get tax relief on the amount up to your earned income in the year of contribution.

Any thoughts on how this will all shake out?

Under self assessment, you will need to notify HMRC of this. They will ask you to repay the excess tax relief and the money will stay in the pension until you exercise whatever maturity option you are looking at.

You may also want to have a word with your financial adviser as they should not have allowed such a thing to happen (unless there was justification - and there can be but its rare).

saver861

dunstonh wrote: »

That wont work. You only get tax relief on the amount up to your earned income in the year of contribution.

So does that mean the OP has to repay the tax relief and then pay the tax on 75% of the pot also when it is drawn? Ouch!

dunstonh wrote: »

Under self assessment, you will need to notify HMRC of this. They will ask you to repay the excess tax relief and the money will stay in the pension until you exercise whatever maturity option you are looking at.

Are there no checks in place at HMRC to avoid this. As a non-earner they would be aware of the status? I mean if Mr Bean puts in his max allowance, then the nice people at HMRC just make up the relief, no quessies asked? hmmmmm .....

dunstonh wrote: »

You may also want to have a word with your financial adviser as they should not have allowed such a thing to happen (unless there was justification - and there can be but its rare).

If an IFA missed this or, worse still, advised it, I think I would be having more than a 'word' with him or her!!!!!!!!!!!!!!!!!!!!!!!!

jem16

saver861 wrote: »

So does that mean the OP has to repay the tax relief and then pay the tax on 75% of the pot also when it is drawn? Ouch!

It does.

Are there no checks in place at HMRC to avoid this. As a non-earner they would be aware of the status? I mean if Mr Bean puts in his max allowance, then the nice people at HMRC just make up the relief, no quessies asked? hmmmmm .....

There will be checks - it's just a matter of time.

If an IFA missed this or, worse still, advised it, I think I would be having more than a 'word' with him or her!!!!!!!!!!!!!!!!!!!!!!!!

I suspect the OP's adviser is him/herself.

SnowMan

pharmer9 wrote: »

Is it ever possible to retrieve such overpayments?

Have a look at this HMRC page which may give some slight hope

http://www.hmrc.gov.uk/manuals/rpsmmanual/RPSM05101540.htm

A refund of excess contributions lump sum

[Para 6 Sch 29][s188(2)][s190]
Where a member has paid pension contributions in a tax year of more than the maximum amount that can receive tax relief (see RPSM05101120), the amount of contributions that cannot receive tax relief (the excess) may be repaid to the member.

The legislation refers to this as the ‘excess contributions condition’. If this condition is met, the excess contributions can be paid to the member as a refund of excess contributions lump sum.

The payment must be made before the end of the period of six years beginning with the last day of the tax year in which the ‘excess contributions condition’ was met, i.e. the tax year in which the ‘excess’ contribution was paid.

This is therefore the only ‘authorised’ member lump sum that can be paid after the member has reached age 75.

RPSM05101550 gives details of the amount that can be paid and an example of a payment of a refund of excess contributions lump sum.

I expect that in practice it is going to be very difficult to get the amount refunded as a refund of excess contributions lump sum, but I've no experience of this.

You need to talk to HMRC and your pension provider.

saver861

jem16 wrote: »

It does.

So that's an instant loss?? Or am I reading it right.

For rounded example, someone puts in £10,000 which is not eligible for tax relief, thus the total pot is £10,000 all of their own money. They then draw on it and will have to pay tax on £7,500? (Assuming they are BR tax payers).

jem16 wrote: »

There will be checks - it's just a matter of time.

Yes but too late for the OP and anyone else that makes the same mistake.

jem16 wrote: »

I suspect the OP's adviser is him/herself.

Yes that would be my guess too - it was just that dunstonh referred to the OP's IFA, if there is one.

jem16

saver861 wrote: »

For rounded example, someone puts in £10,000 which is not eligible for tax relief, thus the total pot is £10,000 all of their own money. They then draw on it and will have to pay tax on £7,500? (Assuming they are BR tax payers).

They would get tax relief on £3600 of it so £720. The rest would be their own money.

Yes the £7500 would be taxable.

Yes that would be my guess too - it was just that dunstonh referred to the OP's IFA, if there is one.

Tongue-in-cheek I suspect.

Aegis

SnowMan wrote: »

Have a look at this HMRC page which may give some slight hope

http://www.hmrc.gov.uk/manuals/rpsmmanual/RPSM05101540.htm


I expect that in practice it is going to be very difficult to get the amount refunded as a refund of excess contributions lump sum, but I've no experience of this.

You need to talk to HMRC and your pension provider.

This is exactly the route to go down.

SnowMan

Aegis wrote: »

This is exactly the route to go down.

Thanks. I've only come across it in theory. Have you experience of it in practice?

saver861

jem16 wrote: »

They would get tax relief on £3600 of it so £720. The rest would be their own money.

Yes the £7500 would be taxable.

Ok - I think snowman above has expanded on it a bit - from that it would seem the excess would be refunded. So, it would seem at least you would get your money back without having to pay the tax on it. However, it does not look straightforward at all ...

jem16 wrote: »

Tongue-in-cheek I suspect.

Yeah I guess .. though dunstonh being a more serious and sensible sort of chap I read it as such ...

dunstonh

Tongue-in-cheek I suspect.

A little. I wrote it more or less guessing it was non-advised.

Thank you snowman for that link.