RPSM05101520 - Technical Pages: Contributions and tax relief: Member contributions: Refunds of contributions: Preservation

Preservation

DWP legislation provides a level of benefit protection to a member of an occupational pension scheme who leaves that scheme before their ‘normal pension age’ under that scheme. This is referred to as ‘preservation’. The principal requirement of preservation is that where a member leaves pensionable service under an occupational pension scheme with at least 2 years ‘qualifying service’ they will be entitled to a minimum level of preserved benefit from the scheme. This preserved benefit is referred to more specifically as a ’short service benefit’. The short service benefit represents a fair proportion of what the member’s prospective benefits would be under the scheme at their ‘normal pension age’.

However, a scheme doesn’t have to wait the full 2 years to give members such short service benefit rights. Schemes are free to give members these rights much sooner.

Where a member leaves pensionable service before acquiring rights to short service benefit under the scheme (for example, before completing two years qualifying service) DWP legislation still requires that the member be given certain benefit options, providing that is, they have by then completed at least 3 months of pensionable service under the scheme. Those early-leaver options are:

• A refund of their own contributions to the scheme (see RPSM09104700 for an explanation of when such contributions can be considered to be authorised payments under the tax rules) or
• A transfer of their accrued rights, which will include the elements provided by the employer as well as their own contributions (see RPSM14100000 to find out when transfers are authorised under the tax rules).

Whilst schemes are free to preserve members’ benefits sooner than the 2 year limit laid down in legislation, there is one situation in which the DWP legislation ensures that a member will automatically acquire short service benefits rights much sooner. This is where the scheme has accepted a transfer value from a personal pension scheme or a retirement annuity contract. In these circumstances the member has an entitlement to a short service benefit immediately and is not therefore able to receive a refund of their contributions even if they have less than 3 months pensionable service in either or both schemes.

The relevant DWP legislation is Chapter I and Chapter 5, Part IV Pension Schemes Act 1993 (particularly section 71, which defines the above terms used, and sections 101AA to 101AI, as introduced by section 264 of the Pensions Act 2004) and the Occupational Pension Schemes (Preservation of Benefit) Regulations 1991 (SI 1991 No 167).