TPAS - The Pensions Advisory Service

Leaving Service Options

If you leave your employer's occupational pension scheme with more than two years service, the trustees of the scheme must by law give you the choice of a:

• Preserved pension payable from the scheme's normal retirement age.
• Transfer to a new employer's occupational pension scheme.
• Transfer to a personal pension scheme, stakeholder pension scheme or section 32 buy-out policy.
• The option of a transfer payment should also be given if you have more than three months service, but there is no requirement to offer a preserved pension if you have less than two years service.

It first became a legal requirement to provide a preserved pension, subject to certain conditions, from 6 April 1975. Many pension schemes did not provide any preserved pension for members who left before this date. Under contributory schemes members were given a refund of their own contributions when they left employment. In schemes that did not require member contributions there was usually no benefit at all on leaving service.

If you leave the scheme without completing two years service, you may (subject to the rules of the scheme) be able to obtain a refund of any contributions you have made. If you have more than two years service, the law does not allow you to have a refund. For leavers before 6 April 1988 the specified period was five years rather than two.

If you left your scheme before 1 January 1986, the trustees/scheme authorities did not have to offer you a transfer value as an alternative to a preserved pension. The Pensions Act 1995 however extended the right to a transfer value to those whose pensionable service terminated before 1 January 1986 unless they are a member of a final salary scheme that fully protects the value of preserved pensions against inflation.

Please note that although you will usually have a statutory right to make a transfer, the trustees of an occupational pension scheme are not obliged to accept one.

The Pensions Act 2004 requires that leaving options should be given to a member within a reasonable period of leaving. The Pensions Regulator expects this to be within three months of leaving service.

Q & As

Can I leave the scheme without leaving my job?

Yes. Membership of an employer's pension scheme cannot be made a compulsory term of employment.

Can I have all the money refunded to me?

If you have left service then only if you have completed less than 2 years' service can the employer refund your own contributions to you. A refund of contribution is subject to tax, 20% to the first £10,800 and 40% for the amounts in excess of £10,800. If you were contracted-out, a deduction will also have to be made to buy you back into the State Second Pension. Please note that the employer contributions are not returned to you. If the scheme is on a money purchase basis - that is, a 'pot of money' grows subject to investment performance - rather than a final salary scheme, then any refund will be based on the value of your contributions. This may be higher or lower than the actual contributions made. If you have completed more than 2 years' service a refund of contributions is not available to you.

Can I have a pension now that I have left?

If you are over 50 and the scheme rules allow. It may be a requirement of the scheme's rules that consent is first obtained from either the sponsoring employer and / or the trustees. If you are under 50, a pension can only be paid on grounds of ill health. The earliest age, except on grounds of ill health, that a pension can be paid early will increase to 55 by 6 April 2010.

What will I get when I leave the scheme?

On leaving an occupational scheme you should, within three months of leaving service, be given a statement of your options. If you have more than two years service and do not make a decision, under a final salary arrangement, your pension will be preserved for payment at your scheme's normal pension age. If you have less than two years but more than three months and do not exercise the option of transferring, the scheme may pay a refund of your contributions, although some schemes will allow your pension to be preserved until retirement. If you have less than three months service the only option may be a refund of contributions.

Under a money purchase arrangement, your fund will remain invested. At retirement, your pension will depend on the investment performance between leaving and taking your benefits, and annuity rates at the time you elect to draw your benefits.

If the scheme is on a money purchase basis then the 'pot of money' built at retirement will be used to buy a pension. Hence the pension will depend upon the amount contributed over the years and what this has accumulated to through investment performance, and annuity rates at retirement. Annuity rates are based on the age and gender of the member at retirement plus the general level of interest rates. As interest rates are currently low then so are annuity rates.

Will the pension be increased?

Whether there will be pension increases depends upon the period of service to which the pension relates, the scheme rules and whether or not the scheme is contracted in or contracted out. Please see our section on pension increases for further details.

What is a preserved pension?

A preserved pension is one that becomes payable in the future (typically at normal retirement age) and to which the employee has ceased to contribute as he/she has either opted out of the scheme or left the service of the scheme.

There may be increases to the preserved pension between date of leaving and when the member takes the pension, depending on the type of scheme, whether it is contracted out or not, the scheme rules and overriding legislation.  Please see our section on revaluation for further details.

What is a transfer value?

A transfer value from an occupational pension scheme is calculated on advice given by an actuary and based on guidelines issued by the actuarial profession. It will normally represent the capital value of the preserved pension and will take into account any guaranteed pension increases due both before and after retirement. The transfer value is the scheme actuary's assessment of how much needs to be invested now to produce a pension equal to the projected preserved pension payable at the scheme's normal retirement age. The rate of return used in this calculation is based on the estimated return from equity investments with an allowance for an element of gilt returns. The transfer value is not related to contributions paid to the scheme. The lower the rate of return used the lower the expected future investment return and so the higher the transfer value needs to be. Conversely, if investment conditions justify the use of a higher rate of return, transfer values will reduce.

For an occupational money purchase scheme, the transfer value is usually the same as the value of the member's fund at the time of transfer.

I left my occupational pension scheme before 1975 and the scheme now says that they have no pension rights recorded to me. Can this be correct?

It did not become a legal requirement to maintain a pension for a member on leaving until 6 April 1975. Usually, for those leaving before this date, any contribution made by the member was refunded on leaving and if the scheme was non-contributory, there was usually no benefit at all on leaving.

Do I have a right to a transfer value from my occupational pension scheme?

If you left your pension scheme after 1 January 1986 you do have the right to have a transfer value quoted to you. The right to transfer will remain until 12 months before your normal retirement date. It may still be possible to transfer within 12 months of your normal retirement date but you would need the consent of your scheme's trustees before doing so.

If you left your pension scheme before 1 January 1986, a pension scheme does not have to provide a transfer value if they fully protect your pension from inflation during the period from leaving until retirement.

If you leave your employer's occupational pension scheme, but remain in your employer's employment, a transfer value in respect of service accrued before April 1988 may not be available until you leave employment.