What is a short service refund lump sum?
In this section we will look at leavers who are entitled to a short service refund lump sum (SSRLS).
SSRLS
If a DB member is entitled to a refund of contributions it will be in respect of their own contributions only. The employer contributions are retained in the fund as part of the scheme assets.
If a DC member is entitled to a refund of contributions, the employer’s share would normally be offset against future employer contributions.
Some scheme rules may allow for interest on the contributions to be paid. However, if interest is paid and this takes the amount actually paid to the member over the sum of their contributions to the scheme, the surplus wouldn’t be an SSRLS but would be taken as a scheme administration member payment.
The amount refunded must not be more than the total contributions paid by the member, plus any interest or investment growth.
Tax is deducted from the refund payment at the rate of:
As the scheme administrator is liable to the tax charge the member usually receives the net amount after the tax has been deducted and the administrator pays the tax due to HMRC.
SSRLS Calculation
A typical calculation is shown in this example:
| Total Member Contributions | £2,500 | |
| Less Tax @ 20% | (£500) | |
| Net Refund paid to Member | £2,000 |
Example if contributions are over £20,000:
| Total Member Contributions | £25,000 | |
| Less Tax on £20,000 @ 20% | (£4,000) | |
| Less Tax @50% on the balance | (£2,500) | |
| Total Tax deducted | (£6,500) | |
| Net Refund paid to Member | £18,500 |
Interest or Investment Growth
Scheme rules may provide for investment growth to be included in the refund of contributions.
A member cannot receive more than the actual amount of contributions paid by them so interest or investment growth could be included to bring the total payment up to this limit and be treated as part of the SSRLS for tax purposes.
Alternatively the scheme rules may provide for interest to be paid in addition to the contributions being refunded and to qualify as a scheme administration payment, it must be at a reasonable commercial rate. In these circumstances the scheme administration payment would be made without deducting tax and the member would declare any interest amount on their tax return to HMRC.
Example including interest:
| Total member contributions paid | £361.63 | |
| Plus AVCs paid | £427.20 | |
| £788.83 | ||
| Less tax at 20% | (£157.77) | |
| £631.06 | ||
| Plus interest/investment growth | £91.79 | |
| Net refund paid to member | £722.85 |
SERPS/S2P
If the member was in a scheme that was contracted-out of SERPS or S2P then both the member and their employer will have paid lower National Insurance contributions so on leaving the member needs to be reinstated into SERPS/S2P.
The amount to be repaid to the National Insurance Contributions Office is based on NI earnings during scheme membership and is known as the Contributions Equivalent Premium (CEP).
The member has to pay his or her share of the CEP known as the Certified Amount (CA) and it is deducted from the member contributions before tax is deducted. See example below:
| Total member contributions paid | £2,500 |
| Less CA | (£500) |
| £2,000 | |
| Less tax at 20% on £2,000 | (£400) |
| Net refund paid to member | £1,600 |
After contracting-out for DB schemes ended in 2016, reinstatement by payment of a CEP will only be available for members who left before 6 April 2016 and will only be available for 3 years from 6 April 2016.
Salary Sacrifice
If a member participated in a salary sacrifice arrangement where they gave up part of their salary in return for more contributions being paid into the scheme, the contributions are generally classed as employer contributions and not refundable. However, an employer may offer an ex-gratia payment based on notional contributions, this would be paid via the employer PAYE payroll and subject to tax and National Insurance deductions in the normal way.
Remember: a SSRLS is no longer applicable for DC scheme members who joined on or after 1 October 2015 and left with more than 30 days service so salary sacrifice is unlikely to apply. For a member of a DB scheme it would only arise where there is a switch from ordinary contributions to salary sacrifice within the two year period.
Refund Payment
In DB schemes the trustees’ bank account normally holds sufficient monies for refunds to be paid without the need for funds to be disinvested.
In DC schemes the member’s fund needs to be disinvested before the refund can be calculated and paid.
Where disinvestment is required there may be a delay in making the payment to the member; Trustees’ signatures may be required and some investment managers only have dealing dates at certain times of the month, whereas others deal on a daily basis.
The refund payment discharges the scheme of all liability to benefits for the member.
