RegulationOct 22 2014

DWP to abolish ‘short service’ pension refunds

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So-called ‘short-service’ refunds, which offer money purchase occupational pension scheme members their contributions back if they have been paying in for less than two years, are set to be banned from October 2015, the Department for Work and Pensions has announced.

Plans were drafted as long ago as June 2011 to change the rules around the refunds, which can be applied for by people who leave their jobs after three months but within two years. Only employee contributions are refunded and the lump sum is liable for a tax charge.

Money purchase occupational pension schemes currently make around 20,000 short service refunds every year, a figure which was forecast to grow with the continuing roll-out of automatic enrolment, the DWP said.

The government added that the change coincides with moves under its auto-enrolment roll-out to develop a system of ‘pot follows member’ automatic transfers, and will ensure that people build up rather than ‘cash out’ savings.

From October 2015, under the new rules schemes will only be able to make refunds within the first 30 days of membership.

The change only applies to DC and not defined benefit schemes, which will retain the facility to make refunds as they are outside the scope of automatic transfers. Personal pension schemes are also not affected as they have never had the facility to make short service refunds.

Steve Webb, pensions minister, pointed out that the average Briton has 11 different jobs in their lifetime.

“If people change jobs regularly and ‘cash out’ their pension each time, they stand no chance of building up a decent pension pot.

“By abolishing short service refunds and developing plans for automatic transfers to help people keep track of their savings, this government will build on its excellent record of helping millions of people save more for a brighter, more comfortable retirement.”

Provision for the abolition of short service refunds was already made in section 36 of the Pensions Act 2014.

peter.walker@ft.com