Along with the recent changes to the way pensions can be accessed, Steve Webb, the Pensions Minister, is keen for those who move companies regularly can get value for money from their pension pots.
Around 20,000 workers each year change companies with less than two years’ service under their belt. Employers often force the ex-employee to cash in their pension in what is called a ‘short service refund’, where they will be refunded their employee contributions, but not the employers’ contribution.
However, Mr Webb, feels that this is unfair to a large section of workers who don’t get the chance to build up a sizeable pension pot and could potentially miss out on tens of thousands of pounds of retirement income, though lack of employer contributions towards their nest egg.
Under the Government’s new plans, only workers with less than 30 days service will be allowed to get a refund of their pension contributions.
With the average person now working for 11 different companies over the course of their lifetime, more and more people are finding themselves with multiple pensions pots or have missed out on building up a decent retirement fund because they have been forced to withdraw their contributions from the scheme.
Even if they have 11 smaller pension pots, all of those pots will be working for them and building up a pot.
The average size of a pension fund when a short service refund is taken is between £1,000 and £2,000, with a typical refund of around £625 to the employee.
Even if the £625 is then put straight into the new company’s pension scheme, the employee will still have missed out on two years’ worth of employer’s contribution which over the years, and with several different pots, could amount to a lot of money.
The changes to the system are likely to come into effect in October 2015, six months after all the other pension reforms take effect.
However, the changes will only apply to defined contribution workplace schemes, not final-salary schemes or personal pensions.
Mr Webb has gone on record as saying that in the future he would like to see a set up where any workplace pension contributions are automatically forwarded to a new company’s pension scheme, so the employee doesn’t lose out on any contributions and get the maximum amount of returns for their contributions over the years by having one large pot, rather than several smaller ones.