Pension Options When Leaving Employment

We are asked this pension question quite frequently:

“What happens to my pension plan when I leave this employment?” Nowadays people are changing jobs or even careers more frequently than they used to, and it has also become a common occurrence to leave Pension savings behind with past employers. When moving from one job to another there are many important things to consider – your Pension is certainly one of them.

Leaving your Pension behind may be the easier route to take but it may negatively impact your Retirement Planning if it is not incorporated into your overall long-term plan.

This can also be a good opportunity to sit down with your Financial Advisor and review how you are meeting your Retirement objectives or how you can improve on them

What happens now?

So, what happens with your pension now that you have left or are thinking about leaving?

The options available depends on the type of pension plan you have, whether it is

1. Defined Contribution (DC) or
2. Defined Benefits (DB)

Most private company pensions are defined contribution (DC), Civil & Public servants are in a defined benefits pension schemes.

The options available will depend on which pension you are in.

Leaving Service Options: Defined Contribution Pension

It’s important to note that your pension benefits are managed and legally owned by the trustees of the scheme, and when departing from the scheme your legal status will change from an ‘Active’ to a ‘Deferred’ member of the scheme. We will later assess the downsides of staying on as a ‘Deferred’ member.

Once you have left your employment you should receive what is known as a ‘Leaving Service Options letter’, or your ‘Pension Benefits Options Statement’.

This “Pension Benefits Options Statement” document will include important information such as:

1. The date you joined the scheme
2. The date you left
3. The value of your Pension
4. And finally set out your choices available to your particular situation upon leaving.

This is the starting point for assessing your options and it is therefore vital that you receive this document. You can request this document from the trustees of the scheme.

Essentially, you have three main options when leaving your employer.

1. Leave your Pension where it is (do nothing).
2. Transfer your Pension to your new employer.
3. Move your Pension into an account in your own name, Personal Retirement Bond/ Buy-out Bond or PRSA

Your Pension Options Explained

1: Leave it in the Pension scheme (in other words do nothing)

Preserved Benefits is a term defined in the Pensions Act to refer to a requirement for occupational pension schemes to maintain benefits for members after they leave. This simply means that you leave the accrued pension benefit accumulated from this employment in the scheme. There are certain advantages and disadvantages to choosing this option. We recommend that you seek advice from one of our trusted advisors before making a decision.

Although the easiest option is to do nothing and leave it in the scheme, leaving your Pension behind is the least recommended particularly because the Pension scheme is under no obligation to keep any engagement with you nor provide you with annual updates on how your pension is being managed or invested.
Therefore, you are left in the dark without the freedom to make investment decisions.

Your pension fund could actually be moved out of investments and into cash leaving it unable to outperform inflation and the associated charges within the fund. As a result, this hinders the growth of your Pension and may set back your Retirement Goals and Objectives.

If you are considering leaving or have left already, and are looking to review your options, we would implore you to answer the following questions:

1. 1. 1. Are the charges fair and transparent?
      2. Is the Pension Provider responsive?
      3. Has your Pension performed well?

If your answers to the above questions did not give you confidence, it would be wise to consider taking your Pension with you.

Pros:

1. 1. • As a deferred member, you will still be able to access your pension at the retirement date. i.e. take a tax-free lump sum; transfer the funds into an Annuity, or opt for an Approved Retirement Fund (ARF). 

Cons:

1. • The Trustees of the scheme are not obligated to keep in contact with you (no regular updates).
   • Your Retirement options are subject to the scheme rules (including early Retirement).
   • Most schemes have limited Investment options since they cater to a large group of employees (your investment could underperform).
   • No access to Financial Advice after you have left the company.
   • When moving jobs, you run the risk of forgetting about the plan and losing contact with it over time
   • Passing away before retirement could complicate matters for your dependents.

2: Transfer your pension to your new employer’s pension scheme

Transfers of benefits to your new scheme: Most pension schemes will allow you to transfer your pension benefits from one arrangement to another. You can transfer the pension fund value into your new employer’s pension scheme. However not every scheme allows this so check with your new & previous employer. There are certain advantages and disadvantages to choosing this option though, so take advice.

The advantage with this option is that you will have everything under one roof, and it will be easier to work out your overall pension benefits and how much income you would expect in retirement, rather considering a number of different pots.

On the downside, transferring your pension benefits may require you to sell up existing assets in order to transfer them to the new fund. This would introduce the risk of being out of the market for a considerable period, and depending on market conditions, this could mean you selling out at a lower price and buying at higher one.

Pros:

• Pension consolidation – maintaining control over your pension pot and keeping it together in one place.

Cons:

• You may lose accumulated rights of salary and service if you move into the wrong type of scheme being offered.
• If you move jobs again, you will have to address all previous concerns and requirements of moving into new scheme.
• You miss the opportunity to move the fund into your own name (taking complete control over your money and Investment choice).
• All you pension benefits will have to be taking at the one time, that is, when you retirement from the new employer.

3: Move your pension to an account in your own name.

Transfers the fund into an account in your own name: The pension scheme will allow you to transfer your pension fund from one arrangement to another. You can transfer the pension fund value into a Personal Retirement Savings Account or a Personal Retirement Bond (PRB), sometimes called a Buyout Bond. These accounts are in your own name, and you control the investment strategy.

Pros:

• Full control over your pension and Investment decisions (the fund is owned by you personally).
• Advice from Financial Advisor who can put together a tailored investment strategy (based on your attitude to risk) to help you reach your retirement goals and objectives.
• Your accumulated rights are preserved (salary and service details recorded) giving you access to your tax-free lump sum entitlement and increasing your options to draw on retirement.
• Move your PRB from one provider to another efficiently.
• Your benefits can be taken from age 50.

Cons:

Annual Management Charges can be higher depending on the funds/asset classes you choose, your financial advisor will be able to offer advice on the charges.

Take a refund of contributions

Refund of contributions: If you have less than 2 years in the pension scheme you may be able to get a refund of your contributions, less tax at the basic rate. Please Note: If you go with this option, the employer will also get their contributions back.

Which is the best option for you?

Well, it all depends on what option is the best for you personally but if you’re not sure how to proceed, it’s worth speaking with a Financial Advisor. We are happy to advice.

Impartial Advice

The best option for you, is a personal decision which needs to be made by each individual according to their individual circumstances. However, we strongly recommend that you speak to one of our trusted advisors before making such a major financial decision. There are numerous factors to consider, and you need to clearly understand the full implications of the options before reaching a decision. Our Pension Specialists have many years’ experience, in these matters & we commit to delivering you with impartial advice, delivered to you in easy to understand/plain English.

Our recommendation?

In most cases, the Personal Retirement Bond is the most practical route, it is a simple, straightforward way to take your pension entitlement with you when you change jobs. The Pension savings that you have built up are yours, so why not take personal control of the assets you own.

With the ongoing support of impartial Financial Advisors, like Advice First Financial, we will first establish if this is the right option for you, and if so, we can help guide you through the Pension transfer process and ensure that the funds are set up correctly, managed effectively, and monitored continuously!

Personal Retirement Bond (PRB)

A Personal Retirement Bond (PRB) is a product that is specifically designed to take benefits from your previous employment. This includes giving you greater control on your own pension savings, and a better investment strategy allowing you to invest at your own attitude to risk (with added benefit of guidance from a Financial Advisor). You also have the option to move the bond from one pension provider to another if you feel you could get better value on charges, fund allocation rate, and access to funds, etc. However, it cannot be further contributed to.

This route allows you to completely cut ties from your old employer, which means no more involvement of Trustees. The charging structure (Annual Management Charge) can be a higher with PRB’s depending on the funds (or asset classes) chosen but this is considered along with the performance (and active management) of the fund over time. In saying that, you will have the benefit of transparency of charges (which are more competitive than company pensions).

What happens at Retirement Date?

On retirement you can take a tax-free Lump Sum of either:

• 25% of your fund, or;
• A maximum of 150% of salary, based on salary and service.

The maximum tax-free Lump Sum you can take is €200,000.

The remainder of your fund can then be used to purchase:

• A guaranteed income for life (Annuity), or;
• Transfer the balance (after the Retirement Lump Sum is taken) into an Approved Retirement Fund (ARF).

Leaving Service Options: Defined Benefits Pension

When leaving you will have 3 options

1. Retained Benefits
2. Transfer to another DB scheme, recommended if available
3. Transfer to a personal pension plan

Retained Benefits

You can retain the right to a Pension at Normal Retirement Age. Upon leaving, the ‘promised benefits will increase to take account of inflation. Your HR will issue a benefit statement outlining what you retained benefits are. The retained benefits will be based on your service up to your leaving date and your salary in that year.

Pro’s

• Defined benefit Schemes provide more certainty of income at Retirement. You should be offered a guarantee of income at retirement.

Con’s

• HR are not obligated to keep in contact with you (no regular updates).
• No access to the benefit until your normal retirement age
• Passing away before retirement could complicate matters for your dependents.

Transfer to another DB scheme

You may also transfer your Pension benefits elsewhere– for example to a new Occupational Pension Scheme.
If this option is available, it would be our recommended option

Transfer to a Personal Retirement Plan (PRB)

If you decide to exercise a Transfer (this should be carefully considered under a DB Scheme) the Pension Scheme is obliged to make available to you, a transfer value in the first two years. (After the first two years, a transfer value is at the discretion of the trustees)

Where the Scheme is solvent, that transfer value will reflect the value of your future annual benefit entitlements. Where a Scheme is not solvent, then the Trustees are duty-bound to reduce the transfer value in a proportion determined by the scheme actuary.

Con’s

• You give up any guarantee of income which would be provided under the retained benefits option

Pros:

• Full control over your pension and Investment decisions (the fund is owned by you personally).
• Advice from Financial Advisor who can put together a tailored investment strategy (based on your attitude to risk) to help you reach your retirement goals and objectives.
• Your accumulated rights are preserved (salary and service details recorded) giving you access to your tax-free lump sum entitlement and increasing your options to draw on retirement.
• Move your PRB from one provider to another efficiently.
• Your benefits can be taken from age 50.

Advice: We strongly recommend seeking advice from a trusted advisor before transferring from a Defined Benefits pension scheme

Next Steps: So, how do you begin the transfer process from your previous employer?

If you are currently planning on leaving your Employer or looking to take old Pension benefits that were previously left behind, the first step is to contact the HR Department at the company and request your ‘Leaving Service Options.‘

The HR department or pension administrator will make a request to the trustees on your behalf to issue you with your ‘Leaving Service Options Letter‘ outlining the current value of your benefits and your available options.

Once you received this letter, give us a call at 074 910 3938

Alternatively, if you would like to speak to one of our Qualified Financial Advisors first to discuss your situation, get in touch.

How to Retrieve Your Old Pension Info

If you have left a pension behind in a previous job, and don’t have any up-to-date info on the pension, here are 4 ways to obtain the info needed

You could

• Contact the pension trustees, if you have an old document or correspondence from them. If you
• If you don’t have any correspondence on the pension, you should contact your previous employer or HR dept, they should be able to tell you who the trustees of the scheme are and are able to give contact details. If they don’t know who the trustees are they should be able to tell which life company the pension scheme is with. You can then:
• Contact the life company direct, if you know which life company the scheme is with, they should also be able to help. The life company will ask your
  1. Name
  2. Date of Birth
  3. The address you were at when you were a member of the pension scheme
• If none of the above are workable for you, contact a Financial Broker who should be able to help

If you have questions or need advice on Retirement & Pension as well as Pension Options when leaving Employment in Donegal, call 074 9103938 or email now.

Get Advice

Talk to us now and make an appointment with one of our Letterkenny team of QFAs. We are here to help with your Financial Planning Concerns. Ask us questions on Retirement & Pension, Life Insurance & Protection, Mortgages, and Investment Advice. Get in touch here or give us a call at 074 910 3938.

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