For many out there, deciding whether or not to move jobs/companies can be one of the biggest and, oftentimes, stressful decisions you’ll make over your career - especially if you’ve worked in the same company for many years. An incredibly important question you must ask yourself before moving companies is, when you change jobs, what happens to your pension?
In modern times, we are seeing an increase in the frequency at which people are changing jobs and companies. The term “the Great Resignation” was coined towards the end of the Covid-19 pandemic to describe the number of people who were leaving their jobs in pursuit of new ones. In fact, a recent global PwC survey stated that one in five surveyed employees are likely to switch jobs in the next 12 months.
If you’re looking to leave your current job and have an occupational pension scheme (often referred to as an employer pension) with your current employer, it can be tricky to know what to do. In this blog post, we will discuss the options available to people who have an employer pension and are looking to move to a new company.
Before we go into detail answering the question at hand, let's take a quick look at what an occupational pension scheme is. An occupational pension scheme is a pension that is provided to you by your employer. Usually, an employer will contribute a percent of your salary up to a maximum and the employee would match this. The pension contributions by the employee are deducted from your salary before you receive it (net of any tax rebate) and the pension pot grows over time. When you retire, you will receive payments from the pension pot which can be used to supplement your income in retirement.
There are two types of occupational pension schemes: defined benefit (DB) and defined contribution (DC). In a DB scheme, the amount of money you will receive in retirement is determined by factors such as your salary and length of service with the company. In a DC scheme, the amount of money you will receive in retirement depends on how much has been paid into the pension pot and the investment performance of the pension fund.
Below we will look at the options that may be available to you when leaving your job under both defined benefit and defined contribution employer pension schemes.
If you are leaving a company and decide to leave your pension where it is, you become what is known as a deferred member of that pension scheme. There are both pros and cons to becoming a deferred member of a pension fund and these pros and cons vary depending on the type of occupational pension you subscribed to in your previous job.
If you have a defined benefit pension scheme, it may or may not be in your financial interest to leave the ‘fund’ within the DB scheme. Pension benefits depend on Salary and Length of service with the company. Many companies have closed or will be closing their DB schemes in the future as they are increasingly expensive to maintain fully funded. A question you need to ask yourself is if your scheme is not fully funded, what level of payment can you expect to receive at retirement, given that existing pensioners will be paid first. This is an important reason as to why you should speak to an experienced financial adviser on the matter, such as those we have here at FitzGerald Flynn.
If you have a defined contribution pension scheme, it may not be in your financial interest for you to leave your pension with your previous employer. This is because in a defined contribution scheme, the amount of money you will receive in retirement depends on how much has been paid into the pension pot and the investment performance of the pension fund. If you become a deferred member of a DC pension fund, your previous employer is under no legal obligation to inform and update you on the performance of the pension fund or how your pension pot has grown. Furthermore, if you do not keep an active eye on the performance of your pension fund, there is a risk that it could under-perform and you could end up with less money in retirement than you expected. Additionally, in the unfortunate circumstance that you pass away before reaching retirement, the process of your family claiming the proceeds of a deferred defined contribution pension can become complicated, which can be very stressful at such a sad time for the family.
If you have decided that you would like to take your pension with you when you leave your current employer, then you may be able to transfer your occupational pension scheme to your new employer. This is known as pension portability.
Pension portability can be a complex process, and the rules vary depending on the type of occupational pension scheme that you are subscribed to. For example, some defined benefit schemes do not allow members to transfer their pension pots to a new employer, whereas some do. It is therefore important that you check with your pension provider to see if pension portability is an option for you. Transferring your pension to your new employer can be logistically beneficial as it can make pension administration simpler. It can also be financially advantageous as it may allow you to consolidate your pension pots into one place, which could make it easier to keep track of your pension and monitor their performance.
If pension portability is an option for you, then it is always advised that you reach out to a financial adviser. Transferring to a new employer’s scheme or to a Personal Retirement Bond (PRB)/Buy out Bond (BOB), whilst suitable for most, may need more ‘teasing out’ for specific circumstances. We at FitzGerald Flynn have many years of experience in this area. Please contact us with any queries - our professional team will be delighted to help.
An important factor to consider regarding defined contribution pensions is that, in Ireland, if you leave a job before completing two years of service in that company, you are entitled to a refund of all your pension contributions. However, if you leave before two years of service, your employer can hold onto the entirety of their contributions. If you have more than two years service with a company, the general rule is that the entirety of the pension pot is yours. Transferring a defined contribution pot to a new employer scheme can be very advantageous as it means you can transfer the pot into your new company’s scheme tax free. Note, if you were to claim the benefits of your pension pot when leaving a company, this sum is subject to 20% tax. Additionally, if you transfer your DC pension to a new employer, your previous time of service with your previous company counts towards the two-year rule allowing for full ownership of your pension pot.
A risk to consider when looking to transfer your pension from one employer to another is that in doing so you will have to sell all assets held in your previous pension fund in order to move the proceeds to a new pension. This means that there will be a period where this money is not invested in the market and could lead to you missing out on investment opportunities or having to re-buy an option at a higher price than you sold it at.
Ultimately, there are a lot of factors to consider when deciding whether or not to transfer your pension to a new employer. It is therefore important that you seek professional financial advice before making a decision.
If you do decide to leave one company, especially one you have been with for a long period of time, and move to another, this can be a great opportunity to claim more freedom over your pension and investment portfolio. This could be the perfect time to transfer your pension into a Personal Retirement Savings Account (PRSA) or a Buy-Out bond (BOB)/(PRB).
Personal Retirement Savings Accounts offer pension savers a high degree of control over their pension. PRSAs are a great option as they are specifically designed to allow you enjoy the benefits of previous employment pension. A PRSA allows you to directly contribute to your pension while also affording your new employer to make contributions too. With a PRSA, you may find it easier to keep track of your pension as well as having greater control and input into the types of investments being made.
Buy Out Bonds or Personal Retirement Bonds are another option for people who want more control over their pension. BOB’s are generally used by people who have left an employer and want to take control of their pension pot. With a Buy Out Bond you can choose how and where your pension is invested. PRB’s/BOB’s can be taken out in the following situations:
Taking personal control of your pension can be a great option when leaving your job and can ultimately lead to a much larger pension pot waiting for you when you retire. If this is the route you opt to take, be sure to reach out to a professional financial adviser, here at FitzGerald Flynn. By reaching out to us, we will be able to create a tailored investment strategy for you, helping to ensure that you are on the right path to pension success.
When it comes to your pension, it is important that you take the time to understand the options available to you and make sure that you are making the best decision for your individual circumstances. If you are unsure about anything, seek professional financial advice. Remember - your pension is YOUR money and YOU have control over what happens to it. Get the professional help you need today.
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