Contribution Refund

Your occupational pension scheme (see Occupational Pensions) may offer you the chance to have your contributions refunded when you leave the scheme (see Leaving a Pension Scheme Early). This will only be possible with occupational schemes, and not with other private pension schemes, and only if:

• your occupational scheme allows contribution refunds
• you have been a occupational scheme member for less than two years

If you are allowed a contribution refund, any contributions made to your pension fund by your employer whilst you were a scheme member will not be refunded to you. You will also be required to pay twenty percent tax on the first £10,800 of the lump sum and forty percent tax on the remaining balance. You will not be able to reclaim any of this tax on your tax return; it is a standard tax rate which applies to all contribution refunds made in this way. You may be entitled to interest on your contributions if your pension scheme treats them as savings; in this case the interest would also be subject to taxation. Some pension schemes will arrange for you to be contracted out of the State Second Pension when you join, see Contracting Out, and arrange for you to be contracted back in when you leave their alternative scheme. If this is the case, your pension fund may be reduced accordingly to pay for contracting you back into the state scheme, effectively paying the contributions you would have paid to the State Second Pension had you been contracted in.

For example, you have been in your occupational contracted-in pension scheme for twelve months, making monthly contributions equivalent to four percent of your monthly salary. You are paid £25,000 a year. At the same time, your employer has been making monthly contributions equivalent to six percent of your monthly salary. You have been receiving interest at four percent of your savings; the interest is paid at the end of the year.

A contribution refund would mean losing the employer's contributions, and paying twenty percent tax, since the total does not exceed £10,800. You will also be required to pay basic rate savings rate income tax on the interest, currently twenty percent.

Of your initial £2599.96 pension fund on leaving the scheme, you would receive only £879.97 if you chose a contribution refund. You have effectively lost £1719.99 of retirement savings. Unless you need your cash back to cover a financial emergency, contribution refunds often leave you with a small lump sum in comparison to the original pension fund and for this reason do not usually offer you the best long-term deal. In the long term it may be better to opt for a pension fund transfer, especially if you are leaving your current employer to begin a new job and do not want to leave your pension fund in the current scheme. For more information on transferring your pension fund, see Pension Transfer. If you decide that you do want your pension savings contributions to be refunded, you should contact your pension scheme administrator to enquire as to how you should begin the process. If you are unsure about whether a contribution refund is the best option for you, contact an independent financial advisor for individual advice.

If you would prefer to leave your pension fund in the current scheme, see Freezing your pension fund.