The Government has decided not to allow short service refunds to continue for “micro” pension pots, despite industry concern about the costs associated with administering small funds.
Under existing rules, trust-based pension schemes are allowed to refund a member’s contributions if they stay with the employer for less than two years. If this happens, the employer also gets their contributions back.
The Government is currently looking at banning short service refunds, potentially as early as 2014. However, the Department for Work and Pensions had been considering introducing new rules which would have allowed both trust and contract-based schemes to refund micro pots.
An email sent by a DWP official, seen by Money Marketing, confirms pensions minister Steve Webb (pictured) will not legislate to allow refunds for micro pots. The Government has not provided a definition of a micro pot.
Aegon regulatory strategy manager Kate Smith says: “If you look at how we do refunds now, it is quite complex.
“We talked about the idea of extending the short service refunds rule to all pensions, including contract-based, if it was a micro pot.
“From an administration point of view it would have been incredibly expensive and complex.
“The Government has decided it is too expensive and too complex, so it will not do it.”
Hargreaves Lansdown head of pensions research Tom McPhail says: “The DWP still wants to get rid of short service refunds, but the industry had some concern about people who were auto-enrolled and then changed jobs after a couple of months and ended up with a tiny pension pot.
“The question was asked about whether we could have a micro pot refund, just as an administrative easement. But the DWP has said no.”