Early Leavers of Pension Schemes

Until 6 April 2006, companies could impose a minimum period of service before employees could qualify for the benefits of their occupational pension scheme. This was known as the vesting period, and could be up to two years.

Scheme members who left during the vesting period only received a refund of their personal contribution, net of tax and possibly a deduction to buy back their benefits in the State 2nd Pension (S2P). This saved employers money on employees who frequently changed their jobs, although it meant these employees often had no pension rights.

This changed on 6 April 2006. Although schemes can still impose a vesting period of up to two years, members with at least three months service will be refunded their contributions and have a second option – the opportunity to transfer to another (occupational or personal) pension scheme.

If members choose the alternative option, they not only benefit from their own contributions, which remain invested, but also any contributions from their employer.

If you run an occupational pension scheme, you need to be aware of these rules and ensure you follow all the correct procedures.

The Explanatory Memorandum to the Statutory Instrument (SI 2006/33) which introduced the legislation, provides examples of costs for the scheme. In some cases, the cost to the scheme of a transfer is less than the cost of a refund to the scheme member. This is because in addition to the refund to the member, the scheme has to pay the tax deducted from the refund, and in certain circumstances, the scheme must pay a premium to buy the member back into the S2P.

Please contact us for advice on this or any other aspect of running a pension scheme.