Short Employment Pension Refunds Banned

Short Employment Pension Refunds Banned.

Pensions Minister Steve Webb has confirmed that with effect from April 2015, refunds from company pensions schemes for people who have currently worked there for less than 2 years will be banned.

The Pensions Minister sited that the UK needs to offer stability in the pensions system with a sustainable route for pensions.

We suggest frequent job changers do not build up pensions rights easily

1. People who change jobs frequently are not building up pension rights as they take a refund
2. People who change jobs frequently leave before they become eligible to join the company pension scheme
3. People move around and leave lots of little pension pot trails, meaning that each individual pension pot can diminish with management charges over a number of years.

Currently, the legislation allows for

1. Short term employees who joined true, occupational based, company pensions (not a group stakeholder or group personal pensions) receive a full refund of their own, personal, contributions if they have been there for less than two years, the refund does not apply to employers payments – these are paid back to the employer.  (This also means the employer does not have the burden of having to run and administer little pension pots for employees that left years ago).
2. Previously, the rules used to be that if you left within 5 years you could receive a pension contributions refund.

The new rules will mean that all payments made into pensions for employees will stay inside pensions until the employee/former employee either transfers the pension pot to a new pension scheme or retires and takes the pension benefit at retirement.

Our view

It makes sense, with the new, more transparent and penalty free “workplace”, auto enrolment pensions, that no refunds are allowed are employee are free to move these pension to new employer, ‘workplace’ pensions very quickly.

We still believe this will be a headache for those employers, a particularly larger ones, that still run quality final salary, defined contribution schemes and those that pay higher contributions to investment linked “occupational money purchase” schemes.

We suggest the move will force more employers to move away from good quality pension schemes, will force them to think about only paying the minimum amount rather than paying in huge sums for employees that then leave after a short period and neither employee not employer can get their money back.

More employers will move to simpler, workplace “auto enrolment” pension schemes – a very, very basic personal pension plan (for those that do not know)