FERS Contribution Refund vs Deferred Annuity: Which One Should You Choose?
If you're choosing between cashing out your FERS contributions on SF 3106 and leaving them in the fund for a deferred annuity, compare the annuity amount and start date with the refund amount, including applicable interest, tax treatment, survivor benefits, reemployment plans, investment assumptions, and life expectancy. A break-even calculation can show how long annuity payments would take to exceed a refund invested on your own, but the result depends on those inputs.
That's the short answer. The rest of this page walks through the comparison in detail, because the financial gap is larger than most people expect — and the SF 3106 refund comes with permanent consequences that go far beyond the pension itself.
The Two Options at a Glance
| Factor | SF 3106 Contribution Refund | Deferred Annuity |
|---|---|---|
| What you get | Lump sum of your FERS contributions (plus interest if you served more than one year) | Monthly annuity may start at age 62 with 5+ years, age 60 with 20+ years, or at MRA with 30+ years; an MRA start with 10–29 years is reduced unless the age reduction is avoided by a later start |
| FEHB/PSHB health coverage | No coverage through the refunded service after TCC; a later return to covered service may create new eligibility | Cannot be continued through a deferred annuity; a later return to covered service may create new eligibility |
| Survivor protection | Voids survivor annuity rights tied to the refunded service; a later redeposit may restore credit under current FERS rules | A surviving spouse may qualify if you had at least 10 years of service (including 5 years of civilian service), were married at separation, and meet the other survivor-benefit conditions |
| Tax treatment | Principal is tax-free; for refunds of $200 or more, 20% federal withholding applies to taxable interest paid directly unless it is rolled over | Monthly payments are taxed as ordinary income with a small tax-free basis recovery |
| Reversibility | Refund rights tied to that service are voided; if you were covered by FERS on or after October 28, 2009 and later return to FERS-covered service, a redeposit may restore the service for annuity computation | You may request a refund later only while you remain eligible under OPM's refund rules |
| Key trade-off | Immediate lump sum; annuity and survivor rights tied to refunded service end unless you qualify for and complete a later redeposit | Preserves the deferred annuity, but start date, age reduction, health coverage loss, and COLAs matter |
The Break-Even Math
The FERS basic annuity formula is 1% × high-3 average salary × years of creditable service. An employee who separates at age 40 with 15 years of service and a $95,000 high-3 salary locks in a deferred annuity of $14,250 per year ($1,187.50 per month) starting at age 62, adjusted for COLAs after the annuity begins.
That same employee's FERS contributions are generally 4.4% of basic pay for eligible employees hired on or after January 1, 2014, 3.1% for many 2013 hires, and 0.8% for many earlier hires. Assuming $95,000 basic pay in each of 15 years, employee contributions before any refund interest total about $62,700 at 4.4%, $44,175 at 3.1%, or $11,400 at 0.8%. An SF 3106 refund includes applicable interest, so these principal-only amounts are not the actual refund balance.
For the 4.4% contribution example: $62,700 invested at a 7% average annual return over 22 years grows to roughly $277,800. At age 62, a 4% withdrawal produces about $11,110 per year — less than the $14,250 guaranteed pension, which also gets annual COLA increases and never runs out. This investment example uses principal only and omits any interest in the actual SF 3106 refund.
For the 0.8% contribution example: $11,400 invested identically grows to roughly $50,500. A 4% withdrawal produces about $2,020 per year against the same $14,250 pension. On these principal-only assumptions, the example pension is about seven times the withdrawal amount; including refund interest changes the comparison.
The result changes with service length, high-3 salary, annuity start date, refund interest, taxes, investment returns, survivor benefits, and how long the annuity is paid. Include those inputs in the comparison rather than treating one example as a universal result.
The Consequences of Taking a Refund
The SF 3106 refund ends annuity and survivor rights tied to the refunded service. If you were covered by FERS on or after October 28, 2009 and later return to FERS-covered service, you may be able to restore annuity computation credit by redepositing the refund plus interest.
- Survivor annuity rights. A refund voids survivor annuity rights tied to the refunded service. Form SF 3106A documents notice of the refund application to a current spouse and certain former spouses; it is not a consent form. OPM has procedures if a spouse refuses to acknowledge notice or cannot be located.
- Health coverage tied to this separation. A refund provides no annuity through this service to trigger postponed-retiree re-enrollment. A later return to covered federal service may create new eligibility if you meet the applicable service and enrollment rules.
- Service in the annuity computation. If you were covered by FERS on or after October 28, 2009 and later return to FERS-covered service, refunded service counts toward retirement eligibility but not the annuity computation unless you redeposit the refund plus compound interest. Redeposit interest accrues from the refund date through full payment or the annuity commencement date, whichever comes first, at variable annual Treasury rates. OPM must resolve the redeposit before authorizing the annuity. At a hypothetical 3.5% average annual rate, a $62,700 balance would grow to about $88,400 over 10 years; OPM applies the relevant annual rates.
Leaving the contributions in the fund preserves the deferred annuity rights tied to that service, but does not preserve FEHB or PSHB through the deferred annuity. You may request a refund later only while you remain eligible under OPM's rules. Contributions remain in the fund until you claim the annuity or OPM pays a refund.
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Who This Is For
- Federal employees with 10+ years of service who are resigning before their Minimum Retirement Age and want to compare a deferred annuity with a refund
- Mid-career employees with 5–9 years who want a neutral comparison before signing SF 3106
- Anyone whose spouse would be affected by the loss of survivor protection
- Former federal employees who took the refund years ago and want to understand what returning to government and redepositing would cost
Who This Is NOT For
- Employees eligible for immediate retirement — you have better options than either of these; see your agency HR or the FERS eligibility timing guide
- Employees with fewer than 5 years of creditable civilian service — you are not vested in a deferred annuity on that service; consider how a refund or a later return to covered federal employment affects your plans
- Anyone looking for investment advice on where to put a refund — this is process navigation, not financial planning
The Tradeoffs, Honestly
Keeping the deferred annuity means your contributions remain in the federal retirement fund. Depending on your service, the annuity may begin at age 62 with 5+ years, at age 60 with 20+ years, at MRA with 30+ years, or at MRA with 10–29 years with an age reduction. The high-3 salary freezes at separation. FERS COLAs generally do not begin until age 62, even if an eligible annuity starts earlier.
Taking the SF 3106 refund means you control the money immediately. If you invest it well, you might come out ahead in nominal terms. But you bear the investment risk and give up survivor protection and annuity computation credit tied to the refunded service unless you were covered by FERS on or after October 28, 2009, later return to FERS-covered service, and redeposit the refund.
The financial result depends on each employee's service history, refund balance and interest, annuity start date, taxes, investment assumptions, survivor needs, and longevity.
The Complete Framework
The Leaving Federal Service Early guide includes a printable Refund vs. Deferred Annuity Comparison Calculator that walks through the full break-even analysis with your actual numbers: your contribution balance, your high-3 salary, your years of service, and the compound interest cost of a potential redeposit. It also covers the SF 3106A spousal notification process, the 20% mandatory tax withholding on the interest portion, and the IRA rollover option to defer taxes.
Frequently Asked Questions
Can I take a partial refund and keep part of my deferred annuity?
No. The SF 3106 refund is all or nothing — you either leave all contributions in the fund and preserve your full deferred annuity, or you withdraw everything and forfeit all annuity rights. There is no partial cashout option under FERS.
What happens if I take the refund and then get rehired by the federal government?
If you were covered by FERS on or after October 28, 2009, refunded service can count toward retirement eligibility after you return to FERS-covered service, but not toward the annuity computation unless you redeposit the refund plus interest. OPM charges redeposit interest from the refund date through full payment or the annuity commencement date, whichever comes first. OPM must resolve the redeposit before authorizing the annuity.
Does the deferred annuity get cost-of-living adjustments while I wait?
No. COLAs do not apply during the deferral period. Your high-3 salary and the annuity amount stay frozen at the values locked in at separation. FERS COLAs generally begin at age 62, even if an annuity starts earlier at age 60 with 20 or more years of service.
Is there a deadline to file SF 3106?
You must be separated for at least 31 days before a refund can be paid. OPM also cannot pay the refund if you are currently in a FERS- or CSRS-covered position or will be eligible to retire within 31 days after OPM receives your application. There is no general filing deadline, so you can apply years after separation if you remain eligible. If your refunded FERS service totals more than one year, the refund includes interest at the rate paid on government securities; OPM calculates the amount. Redeposit interest is a separate charge and accrues from the refund date through full payment or the annuity commencement date, whichever comes first.
My spouse doesn't want to sign SF 3106A. Can I still get the refund?
No. Form SF 3106A documents notice to your current spouse and certain former spouses; it does not require consent to the refund. If a spouse refuses to acknowledge the notice, OPM's instructions allow two witness affidavits describing your attempt to notify them or an address where OPM can send certified notice. If you cannot locate a spouse, OPM may waive the notice requirement when you provide specified evidence. OPM must be satisfied that the notice requirement is met before paying the refund.
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