Irwin Mitchell | Pensions Update | Defined Contribution Schemes: Abolition of Short Service Refunds of Contributions

Defined Contribution Schemes: Abolition of Short Service Refunds of Contributions

Currently, individuals who leave their occupational pension scheme (defined benefit or defined contribution) with less than two years’ qualifying service have a statutory entitlement to a refund of contributions. However from 1 October 2015 the circumstances in which a member of a DC occupational pension scheme qualifies for short-service benefit on leaving pensionable service are changing.

Where an individual joins a DC scheme on or after 1 October 2015 (or re-joins an arrangement having already taken a refund or transfer on or after 1 October 2015) he will only be entitled to a contribution refund if he leaves the scheme with less than 30 days’ qualifying service (tying in with the period a member has to opt-out of automatic enrolment). Where he leaves the scheme with 30 days or more qualifying service he has a statutory entitlement to a short service benefit, i.e. if he leaves service or opts out his benefits will be preserved within the scheme and will generally be payable from normal pension age under the scheme rules.

This change effectively aligns the position under occupational DC schemes with that under personal pension schemes, where a member may cancel their contract during its first 30 days.

Although the Government intended to make the revised statutory short service refund provisions overriding, it may still be necessary to amend DC scheme rules in order to remove any non-statutory rights to refunds granted to members under the scheme rules. Whether or not this is an issue will depend upon the actual wording within each scheme’s rules. Generally speaking if the refund provisions are set out in full rather than making reference to the statutory requirements, it is likely that a rule amendment will be needed. Trustees should check with their legal advisers now to ensure that the leaving service provisions do not inadvertently retain a scheme right to a refund for members joining their DC scheme on or after 1 October 2015.

Under the tax rules in the Finance Act 2004, refunds of contributions are permitted only in respect of individuals who are not entitled to short service benefit. Once the new refund provisions come into force, if a scheme refund is paid to a member it would constitute an unauthorised payment for the purposes of the tax rules, resulting in adverse tax consequences.

Many schemes however contain discretionary provisions which enable the trustees to decide whether or not to make an unauthorised payment. If there is a risk that the scheme rules create a non-statutory right to a contribution refund and the trustees have a discretion not to pay an unauthorised payment, this discretion could be used to prevent short service refunds being made to members until such time as the rules can be amended.

Trustees should also ensure that all new entrants to their DC scheme are advised of the new refund provisions, and that scheme booklets are amended accordingly.

For further information about how the new refund of contribution provisions may affect your DC scheme and for assistance in preparing any rule amendments needed to your pension scheme and member literature please contact the Pensions team at Irwin Mitchell.

Key Contact

Kate Byers