People can move jobs many times during their career but they often fail to consider the pension implications. What should people do with their pension when they change workplace?
Understanding your pension
First, people should clearly understand the type of pension they accumulated with their previous employer under an occupational pension scheme, says Ian Reidy, financial planning manager at RBC Brewin Dolphin Ireland.
“Defined benefit (DB) schemes are occupational pension schemes that provide a set level of pension income for the employee when they retire,” says Reidy. “The level of pension income provided normally is based on your years of service with the company and your level of salary when you retire.
“A misconception is that these DB schemes ‘guarantee’ a pension at retirement. They do not. If the scheme’s assets are not sufficient to pay the benefits and the employer is not able to close the shortfall, then retirement benefits for members may be reduced.”
Defined Contribution (DC) schemes are easier to understand, as the level of retirement benefits is simply based on the value of your pension fund at retirement, says Reidy.
“The value of the fund depends on the level of contributions paid in by the employer on behalf of the employee, the level of contributions that may have been paid by the employee also, and the investment return on the scheme,” he adds.
“When starting new employment, it is recommended that the employee should join the new occupational pension scheme if available. However, transferring benefits from previous employment into the new employer’s scheme is not typically recommended.”
Planning ahead
The options available will be guided by your employment status and whether you had a personal pension or were a member of a company pension scheme, says Sinead McEvoy, head of retirement solutions, Standard Life.
“This is a perfect time to get advice from a financial adviser as each set of circumstances will have personal nuances that could influence a better outcome for your retirement savings,” says McEvoy.
“For those who were in an employer-sponsored pension scheme the options are as follows – leave the benefits in the existing plan and take them at a date allowable by legislation/scheme rules and a date that suits personal circumstances; transfer to your new employer’s pension scheme; or transfer into a policy in your own name, known as a buyout bond.”
Upon leaving employment, you are entitled to a statement outlining your leaving service benefit options, says Nicholas Charalambous, managing director, Alpha Wealth.
“This statement, provided by pension scheme administrators/advisers, will categorise your entitlements and options based on your period of scheme membership,” he adds.
The easy option
When you leave your job, leaving your pension in your old company’s scheme “is the easiest option”, says Charalambous.
“But it’s essential to consider a few factors,” he adds. “You should check how much control you have over your pension within this scheme, as some may limit your investment choices. In this situation, you are often left in the dark without the freedom to make investment decisions.
“In many cases, employees’ pension savings are actually moved out of investments and into cash, leaving them unable to outperform inflation and the associated charges within the fund.
“Additionally, review the performance, charges and overall quality of the pension. If it’s underperforming or has high fees it might be wise to explore other options. Lastly, consider whether you’ll have access to advice on your pension.”
Transfer to new employer
Some pension schemes allow you to transfer your old pension into your new employer’s scheme but this is not always possible.
“This option consolidates your pension savings in one place, making it more manageable,” says Charalambous. “However, you should still assess the control, charges and investment choices available in your new employer’s scheme. Keep in mind that if you change jobs again you may encounter the same questions about dealing with old pensions.”
The PRB option
Movers have another option: a personal retirement bond which, according to Charalambous, offers more control.
“It allows you to manage your investments and receive guidance from a financial adviser,” he says. “You can switch providers for better value, although charges may be higher.
“This option severs ties with your old employer, which means no involvement from the trustee, and involves transferring your pension into a personal retirement bond (or buyout bond in some cases), which is in your name only.”
Contributions refund
If you have less than two years’ service, you can request a refund of the value of your own employee contributions less tax (currently 20 per cent), says Charalambous.
“Typically, you are not entitled to a refund of the employer contributions,” he says.
Do a little research
Moving a pension is relatively easy, a bit like changing utility provider, says McEvoy.
“You need to understand the benefits you have with your current pension and what you will gain – or potentially lose – by moving to another pension product or provider.
“There are rules guiding how you can move pensions so you will need to do a little bit of reading and research in advance. Depending on the complexity and age of your pension, whether it’s a defined benefit or defined contribution scheme, independent financial advice will make this transfer easier and clearer.”
Taking control of your pensions from previous jobs offers several advantages, says Charalambous.
“You gain independence from your old employer’s scheme while keeping your pension separate from your new employer. You have more control over investment choices, transparent fee structures and the flexibility to switch pension providers if desired.
“It also makes it easier to track and manage pensions from past jobs, even those from years ago.”