Help! I’ve changed jobs – what will I do with my pension?
Fiona Reddan: Taking charge of old pensions can be as key as managing your current one
How to handle an old pension will depend on whether it’s a defined benefit or defined contribution scheme
You’ve moved jobs, lost your job, or started out on your own. But while your pension might be one of the last things on your mind when making this decision, it shouldn’t be overlooked.
“It’s unbelievable the impact the decision can have on peoples’ lives,” says Alan O’Brien, a financial advisor with Pensions Advice. “I come across this on a daily basis, and I suppose a lot of people don’t pay enough attention to it”.
And remember, taking charge of older pensions can be as important to your financial health as ramping up your existing one.
If you’re in a defined contribution (DC) scheme:
1 Take your benefits
You could be in line for a cash lump sum if you have only been in your occupational pension scheme for two years or less. Remember however, this only refers to your contributions – not your employer’s . In fact they will get these contributions back, so you’ll be giving up on these.
In any case, taking out money from your pension shouldn’t be done lightly. “I would discourage anyone taking from retirement benefits; you need to start accumulating a pot,” advises O’Brien.
Remember that this lump sum is subject to taxation, at the standard rate, which is currently 20 per cent.
Remember, if you leave a job within two years your employer, as per the legislation, will hold onto any pension contributions they may have paid you
2 Transfer benefits to a new pension scheme
If you’re in a new job, one option is to transfer your existing benefits to your new employer’s pension scheme, thus consolidating all your retirement benefits.
But is this the right approach? “There is a view out there that people should transfer their pensions into existing employment, for the purposes of consolidation, reducing charges, or ease of administration. But it’s very much not the case,” says O’Brien. “I’m a big believer in keeping each pot separate”.
Shane Horgan, a senior pensions consultant and market development manager at Aon, suggests, however, that there are many benefits in transferring to a new scheme. “You’ll have everything under one roof, and you’ll be able to see the totality of your pension benefits,” he says.
Indeed for the average pension saver, this can make it easier to work out how much of an income they can expect in retirement, rather than having to consider a number of different pots.
But a bigger advantage, potentially, is that if you transfer from a previous employer into a new pension plan, this former service will count towards the two-year qualifying rule. “It’s a pretty good incentive,” says Horgan.
Remember, if you leave a job within two years your employer, as per the legislation, will hold onto any pension contributions they may have paid you. So this can be a way around it.
Another point to note is that transferring benefits will require you to sell up existing assets so they can be transferred into a new fund. This can pose a risk, as it means you will be out of the market for a certain period of time, so could end up selling at a lower price and buying at a higher one.
“You could be lucky or unlucky,” says Horgan, adding that while there should be no charges for such a transfer, it’s worth clarifying this at the outset.
Crucially, you will also be giving up, as we will see later, the option of accessing these assets from the age of 50.
3 Become a deferred member
Another option is to simply leave the pension as is. This means that the pension will rise and fall according to how it is invested, as it will benefit from no further contributions.
Once you reach retirement, you will be able to access these funds in much the same way as a live pension; ie, take a tax-free lump sum; transfer the funds into an annuity, or opt for an approved retirement fund.
In addition, being a deferred member offers additional flexibility, as you will be able to access 25 per cent of this from the age of 50.
However, as Horgan notes, managing deferred members of a pension scheme has challenges – for the scheme and members alike.
Opting to transfer your benefits to a buy-out bond allows you greater control over your pension savings
For example, pension plans are under no regulatory obligations to give annual updates to deferred members, which can mean that these savers lose touch with the trustees, and engagement with how their pensions are being invested.
“I would say that the vast majority of schemes don’t [update deferred members]”, says Horgan, although he adds that this could change over the coming months once the Government implements new rules, IORP II.
But not staying engaged can pose risks. “With the best will in the world, people move away from a plan and forget about it and lose contact over time,” says Horgan.
Of course this can pose risks to the performance of the fund; being 90 per cent invested in equities today might suit you, but may no longer be appropriate in 10 years’ time for example.
4 Go for a buy-out bond
Opting to transfer your benefits to a buy-out bond allows you greater control over your pension savings.
“A bond allows the individual to take control of their own investment,” says O’Brien. It breaks the link with the trustees, and means that the “individual has control to administer their own pension, which means they can invest according to their own attitude to risk”.
“It’s specifically designed to take benefits from a previous employment; it cannot be contributed to,” says O’Brien, noting that you’ll have one bond per employment. So if you had previous occupational pension schemes, you could have five different bonds.
He is a fan of bonding, for the “ease of administration, better investment strategy and control” it offers future retirees.
“Bonding is really just tidying up the benefits and let them sit there until you want to move,” he adds.
In addition, as with a deferred scheme, you can also access such a product from the age of 50.
However, Horgan warns that “the charging structure can be a little bit higher” in a bond. This means that, over time, your money might perform better by leaving it in a cheaper occupational pension scheme. They can also be subject to additional charges such as commission and surrender charges.
With a PRSA you’ll have to wait until you actually retire from PAYE employment before you can access it
“If people are going into a buy-out bond, then it’s important that they have an up-front conversation on charges and implications with their broker,” he advises.
5 Transfer to a PRSA
Yet another option is to transfer your pension to a Personal Retirement Savings Account, or PRSA. Held independently by you, this allows you to keep up with your contributions, while your employer can also contribute. With a PRSA, you may also find it easier to continue to direct the investment strategy of your pension fund.
One point to note, however, is that PRSAs are typically more expensive than occupational schemes. Moreover, not everyone who leaves a job will be eligible for a PRSA, as they are typically confined to people with less than 15 years’ service with their employer. In addition, if your pension fund is worth €10,000 or more, you will have to get a Certificate of Comparison, which sets out the advantages and disadvantages of moving into a PRSA. While this might be a useful guide, it has to be drawn up by an actuary and will cost – typically, charges start at about €500 up to about 1 per cent of fund size.
Another point to note is when you will be able to access this PRSA; unlike a buy-out-bond, for example, which can be accessed from the age of 50, with a PRSA you’ll have to wait until you actually retire from PAYE employment before you can access it.
If you’re in a defined benefit (DB) scheme
If you’re in a so-called final salary or defined benefit scheme, where your pension will be paid out in a guaranteed annuity, the decision can be that bit trickier.
Staying as a deferred member of such a scheme can deliver great benefits in the form of a guaranteed income in retirement.
“To my way of thinking, if you’re in a deferred benefit in a plan, and there is a good employer covenant, then there’s merit in staying a deferred member,” says Horgan, adding that a transfer value doesn’t really provide the same benefit as is offered under a DB scheme.
However, as O’Brien notes, this guarantee is really just “a promise” and there can be risks as to whether or not your former company can deliver on this promise.
“The scheme could have a huge amount of deferred members who will drain it possibly before you get to draw it down,” he says, adding that funding and liquidity risks are other issues.
Should you die as a defined benefit member, your spouse might be entitled to a 50 per cent payment. With a buy-out bond, the entire sum will pass to the surviving spouse
“There are a number of factors you need to look at to weigh up the risk. You have to ask “is there a real chance of me getting that benefit at age 65?”
A different approach then, can be to get a transfer value from the scheme, and put these funds into a buy-out bond, which has the aforementioned benefits.
Generally speaking, an individual in their fifties will be looking for a transfer value of about 20 times the promised annuity payment when they retire.
Some companies, keen to get pensioners off their books, will also offer “enhanced” transfer values, which will be worth more than this.
Opting for a transfer value, and then a buy-out-bond, can also give a retiree a larger tax-free sum in retirement, if they subsequently opt for an approved retirement fund (ARF) over an annuity. With an ARF, you can draw down 25 per cent of the fund, tax free, at retirement. If invested well, this ARF can also allow you an income of 4 per cent a year, while preserving the capital.
Another advantage is the associated death benefits – should you die as a DB member, your spouse might be entitled to a 50 per cent payment. With a buy-out bond, the entire sum will pass tax free to the surviving spouse.
However, both approaches carry risks. Your investment in a buy-out-bond/ARF can reduce the value of your pension fund, which could mean you end up with less in retirement than if you had stuck with the DB scheme.
On the other hand, the DB scheme could renege on its promise to you. “It’s a judgement call; all other things being equal, generally speaking, your benefit will be worth more as a DB member than taking a transfer value,” says Horgan.