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Scheme Funding - Refunds of Surplus

Key Points

  • There are circumstances in which a defined benefit pension scheme may have a funding surplus.
  • Refund of surplus to an employer is permitted if certain requirements are met, which differ depending on whether the scheme is ongoing or in wind-up. The requirements include:
    • Ongoing scheme: power in the Rules, refund within limit specified by actuary, in members’ interests to exercise power, 3 months’ notice to members.
    • Scheme in wind-up: power in the Rules, scheme liabilities fully discharged, any power to pay surplus to others considered, 3 months’ notice to members.
  • Section 251 of the Pensions Act 2004 provides that, for an ongoing scheme, the refund or surplus power is lost unless the Trustees passed a resolution meeting the requirements of section 251 to retain the power by 5 April 2016.In practice, this means Trustees must have given written notice of their intention to make such a resolution to members and employers by 4 January 2016.
  • Under the Finance Act 2004, a refund of surplus payment will attract a 35% tax charge payable by the Trustees, which should be deducted from the surplus payment before it is paid.

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