An entitlement to a refund of pension contributions is permissible when the member:
- has less than 2 years qualifying membership and
- is not entitled to the immediate payment of a retirement benefit and
- has not re-joined the scheme within one month and one day of having previously left it and
- has not left employment due to an offence of a fraudulent character and
- has not left employment due to grave misconduct and
- has not re-entered Local Government employment before the refund has been paid and
- is not entitled to any other LGPS pension benefits anywhere in England & Wales and
- is under State Pension Age
Important Note: Where a scheme member opts out of the LGPS within the first 3 months of membership, the refund should be paid through payroll. If the member leaves employment with an entitlement to a refund regardless of the length of membership the Pension Fund will make payment of the refund. Before a refund is paid, the member will need to sign a declaration that he or she has no previous pension rights in the LGPS anywhere in England & Wales. If it is subsequently found that the member has previous rights having claimed a refund those former rights will be lost.
Similarly, where a new employee wishing to opt out of the scheme fails to do so before deductions of pension contributions are made from pay, payroll should refund these contributions through the payroll system providing this is still within the initial first three months of employment.
The contributions refunded to a member include all employee contributions, including any additional contributions paid into the LGPS, but does not include employer contributions. A scheme member may choose to waive the right to receive a refund of contributions for any period and where a refund is not made within one year following date of termination of employment, interest also becomes payable on any eventual refund.
The contributions to be refunded are reduced by an amount of National Insurance (if the member earned above the Lower Earnings Limit) and income tax. The National Insurance deduction is paid to HM Revenue & Customs so as to reimburse any entitlement due to the scheme member from the state scheme. As pension contributions are deducted before tax, a 20% tax deduction is taken from the balance in accordance with the Finance Act 2004. It is worth noting that HM Revenues & Customs rules state that 20% tax must be deducted irrespective of whether or not the employee received tax relief on the contributions paid.
If a scheme member left local government employment between 1 April 1974 and 31 December 1979 with less than 5 years' membership of the LGPS and claimed a refund of contributions it is possible to repay the refund plus interest within six months of re-joining the LGPS. The administering authority may extend this period.
If a scheme member left local government employment between 1 April 1972 and 31 March 1974 with more than 5 years' membership and claimed a refund of contributions, it is possible to repay the refund plus 10% tax within three months of re-commencing pensionable employment. Alternatively the respective period of employment can be kept separate from the current period of employment and the refunded contributions plus the 10% tax can be deducted from the benefits payable at retirement.