WHAT SHOULD I DO WITH MY PENSION WHEN I CHANGE JOB?
You’re about to start a new job so understandably relocating and adjusting to your new surroundings is the focus of your attention. However one must be cautious, this is a time when many people unintentionally make disastrous and irreversible decisions about what to do with their pension from their previous employment. It may be years later before they understand the mistake they made and then of course it is too late to do anything about it.
In my experience, at this point there is usually little or no pension advice offered and if there is it is often biased to suit the the pension advisor of the relevant scheme rather than you. Making the decision of what to do with your pension should be an informed one that provides all the facts, we will look at what you need to consider when making that choice.
So what should you do? First and foremost prior to leaving your previous job you should request a statement of ‘Leaving Service Options’. This will outline your options, which are as follows:
(I) Typically if you have less than 3 years service you can seek a refund for your contributions (which will be taxed as you had the benefit of tax relief when contributing) but you lose the employer contributions.
(II) You can choose to defer the benefits, which means you remain as a member of the ‘old’ scheme for the time being.
(III) You can transfer your fund to the scheme your new employer uses..
(IV) You can transfer your fund to a PRSA
(V) You can transfer to a Personal Retirement Bond.
I’ll ignore (I) as it is self-explanatory. Assuming you had more than two years service how do you decide what to do? The starting point is to determine whether your ‘old’ scheme was Defined Benefit or Defined Contribution. Typically Defined Benefit schemes were offered by the larger employers, however they are becoming more rare because they are expensive for employers to sustain. If your previous scheme was a Defined Benefit scheme where you were promised a certain amount at retirement based on your number of years service, the best advice is (II) by remaining as a member of the scheme the promised benefits typically far outweigh any transfer value they might give you now. For example let’s assume you are 50 years of age and your service entitles you to a pension of €15,000 p.a. from age 65 OR you can take a transfer value of €100,000 to invest into a Retirement Bond / PRSA / your employer’s scheme. What you need to understand is you’d need to grow the €100,000 to something in the region of €300,000+ by age 65 for it to match what is being promised to you by the old scheme. This would require growth of circa 8% p.a. Why would you take the chance? Unless you have good reason to doubt the likelihood of the ‘promise’ being met in the future you are unlikely to match or outperform that outcome by taking control of the transfer value.
If on the other hand your ‘old’ scheme was Defined Contribution there is no promised outcome to rely on. Instead there is a Fund of a specific amount. Essentially you can now do nothing in which case your pension fund remains in the old scheme. In my opinion, this would be a bad decision, you will have no control over the investment and any interaction you have with your pension has to go via the Trustees which can be awkward given you have moved on. There is no benefit to you in leaving your fund with your old employer.
You are now down to 3 choices (III), (IV) and (V) as above. The worst option in my view would be (III), by transferring your ‘old’ pension into your ‘new’ one you have thrown away the option of accessing the fund early, you are now governed by the rules of the new scheme which prohibits access pre-retirement. Similarly transferring to a PRSA (IV) which might seem nice and tidy and offers the potential for future contributions also throws away the early access (pre age 60) option and limits tax free cash at retirement to 25% of the Fund.
I believe the best option by far is to transfer to a Personal Retirement Bond (‘PRB’). By doing so you remove the need to deal with the Trustees of the previous business scheme again. You are now in charge and all communications etc go to you and not the previous employer. You can set up the PRB with the Investment Provider of your choice and you can choose which investment funds you prefer. The greatest advantage is that you can decide when to access the Fund at any time of your choosing from age 50 without requiring you to retire from any subsequent employment. When you access the Fund your tax free cash will be calculated by reference to your service and final salary in the previous job rather than being limited to 25% as the PRSA is. A PRB also offers the option to transfer into your new employer’s scheme at a future date. In the event of your death the full value of the PRB is paid to your estate. The only disadvantage of a PRB is that you can’t make future payments into it as it relates to your previous employment. However this minor disadvantage is irrelevant given the benefits it offers you.
If you have any further questions arising from this article we would be delighted to assist you with any inquiries you may have. If you would like to meet to discuss this or any of other services we provide fill out the below form. The initial meeting is free.