Should Student Take Refund of Under 2 Years Pension Contributions or set up SIPP?

busymumof3

Son is 24 and currently a student again after approx 2 years in the workplace following graduation. It is a one year masters after which he would hope to be employed in a role with a civil service pension. He has two periods of employment and two small pension pots. The first is about 18 months, the second 6 months or so. He has heard from the first scheme giving options to transfer his built up pension or have it refunded. He has not yet heard from the second employer. We are talking a small amount, the first pot is just below £3000 transferable amount or £2600 cash refund.

Given there is only a small difference in the amounts I would be grateful for views about whether it is worthwhile setting up a SIPP either as an interim measure or whether he should take the refund. He is in the lucky position of maxing his ISA allowance this year and is juggling a part time job with studies so is not in an immediate need of the cash refund.

Would welcome views about the advantage of setting up a SIPP and transferring in both small pots or taking the refund. Any SIPP would have to be low fees so as not to whittle away the amount but he could select a higher risk fund at his age with a view to either transferring in to a workplace pension, whether or not it is the Civil Service, or alongside this.  He has not given it much thought and left it very late with the transfer deadline coming up in the next couple of weeks. Also I am concerned about graduate prospects in general at present, and the likelihood of quickly securing a role next summer and the thought that this amount could be more useful in the short term than locked away for 30 plus years. Any thoughts either way would be very much appreciated.

LHW99

IMO (even for a small amount) transferring is preferable - why give up free money!

If both smallish pots go into a SIPP, they will continue to grow (assuming he invests them) and he could then have an option of:

Transferring in to the civil service scheme (there will be a time limit, probably ~12 months) which would get him extra benefots from that scheme, and may mean he will be entitled to a deferred pension from them, even if he leaves that in a short time.

Transferring to another employer's scheme if the civil service option doesn't work out (or he changes some years down the line)

Keeping hold of the SIPP (and even adding to it) to use it as a bridge to allow him to retire before the civil service normal retirement age, without having an early retirement reduction.

Smudgeismydog

Does he need to transfer to a SIPP, or can he just leave the pots where they are?

Marcon

Smudgeismydog said:

Does he need to transfer to a SIPP, or can he just leave the pots where they are?

They are DB schemes and he'd need to have at least two years' membership of (each) scheme to qualify for deferred benefits. Had he transferred the longer period of service into the scheme he joined for 6 months, then he'd have met that bar.

OP - just a thought - are these different schemes? If they are the same scheme, albeit with different employers, your son might check if his service can be 'linked'. Even if it is the same scheme, that might not be possible now he's no longer an 'active' member.

busymumof3 said:

Son is 24 and currently a student again after approx 2 years in the workplace following graduation. It is a one year masters after which he would hope to be employed in a role with a civil service pension. He has two periods of employment and two small pension pots. The first is about 18 months, the second 6 months or so. He has heard from the first scheme giving options to transfer his built up pension or have it refunded. He has not yet heard from the second employer. We are talking a small amount, the first pot is just below £3000 transferable amount or £2600 cash refund.

He's received tax relief on his contributions, so that refund would be subject to tax at 20% before he receives it. 

busymumof3 said:

Given there is only a small difference in the amounts I would be grateful for views about whether it is worthwhile setting up a SIPP either as an interim measure or whether he should take the refund. He is in the lucky position of maxing his ISA allowance this year and is juggling a part time job with studies so is not in an immediate need of the cash refund.

Would welcome views about the advantage of setting up a SIPP and transferring in both small pots or taking the refund. Any SIPP would have to be low fees so as not to whittle away the amount but he could select a higher risk fund at his age with a view to either transferring in to a workplace pension, whether or not it is the Civil Service, or alongside this.  He has not given it much thought and left it very late with the transfer deadline coming up in the next couple of weeks. Also I am concerned about graduate prospects in general at present, and the likelihood of quickly securing a role next summer and the thought that this amount could be more useful in the short term than locked away for 30 plus years. Any thoughts either way would be very much appreciated.

If he's used his full ISA allowance for this year, he could always withdraw some of that if he needs cash to live on in the short term. That way he'd keep the 'free' money from the two employers.

busymumof3

Smudgeismydog said:

Does he need to transfer to a SIPP, or can he just leave the pots where they are?

No option to leave it with the first bigger pot and he has not yet heard from the second employer. Both are public sector but different schemes.

Marcon

busymumof3 said:

Smudgeismydog said:

Does he need to transfer to a SIPP, or can he just leave the pots where they are?

No option to leave it with the first bigger pot and he has not yet heard from the second employer. Both are public sector but different schemes.

The second scheme will be transfer or refund.

DRS1

Don't some (all?) public sector schemes include employer contributions in the transfer value but not in the refund of contributions?  A £400 difference doesn't sound like very much for employer contributions (but it doesn't sound like 20% tax either).

Marcon

DRS1 said:

Don't some (all?) public sector schemes include employer contributions in the transfer value but not in the refund of contributions?  A £400 difference doesn't sound like very much for employer contributions (but it doesn't sound like 20% tax either).

A transfer value from a DB scheme represents the cost to the scheme of providing the benefits built up at the time someone leaves the scheme. There's no explicit 'employer contribution' in the same way as a defined contribution scheme; the transfer value 'is what it is' with a DB scheme.

I too was surprised that member contributions were such a large part of the transfer value quoted, but the son's very young age could explain it - or maybe he paid Additional Voluntary Contributions (seems a bit unlikely, but you never know!). Or possibly a nought may be have popped up where it shouldn't/figures been transposed in the posting...but it doesn't alter any of the principles covered in the question or the subsequent answers.

OP - it would be interesting to know the figures for the period of service in the second scheme if you'd be willing to share them? I confess it's down to professional curiosity rather than anything nobler, so quite understand if not. Given your son was a bit older when he joined/left that scheme, I'd expect his personal contributions (the bit which would be refunded) to be a smaller proportion of the sum available for transfer, all other things being equal.