Assessing your pension options can be difficult. Particularly in an industry full of jargon and acronyms. The aim of this blog is to break down your options and provide you with some clarity.
We change careers now more than ever. In fact, studies show we change careers between three and seven times in our lifetime.
All this chopping and changing can be stressful. Therefore, your pension may be one of the things that fell through the cracks.
Whether you were in a Defined Contribution scheme (DC) or a Defined Benefit scheme (DB), your options will differ.
Whether you have lost your job, changed jobs, or have taken the plunge and became self-employed, it is important to assess your options.
If you have moved jobs and were part of a Defined Contribution scheme, you may have the below options available:-
- Leave benefits in previous employers scheme
- Transfer to a new employers scheme
- Transfer to a BOB/PRB
- Transfer to a PRSA
- Deferred Member
Always take time for any decision regarding your pension. There is no one-size-fits-all when it comes to pensions and each situation is different.
Just because a former colleague took a particular course of action does not mean it is correct for you. Depending on the scheme type, you may have several options available so it is important to assess the pros and cons of each.
Now, let us look at the different types of occupational pension schemes and what options you may have available.
Defined Contribution Scheme (DC) Pension Options
Defined Contribution schemes are the most common type of occupational pension scheme we see nowadays. Often both you and your employer will contribute. For example, you may contribute 5% of your salary and in larger companies, your employer may contribute 10%.
It is a tax-efficient way for both parties to contribute and helps you save for the future in the process.
If you were part of a DC scheme in previous employment, you may have several pension options available to you. Let us take a look at them:
It is worth noting that this will be dependent on specific scheme rules. However, in certain circumstances, you may be eligible to have your own contributions refunded. Again, eligibility will be dependent on the type of pension arrangement and rules associated with the refunding of contributions.
Although, refunding will be only your contributions. You are not entitled to those contributions made by your employer if you decide to withdraw your benefits.
There will also be a tax implication at the standard rate of 20%.
Therefore, it is important to assess all pension options available. Do not decide to withdraw your benefits on a whim.
Enlist the help of a qualified expert who can guide you through the process.
Pension Transfer to a New Employers Scheme
If your new employer has a pension scheme it could be an option to transfer your benefits.
Although, approach with caution. Again, there is no universal approach when it comes to pensions. The advice on transferring pension benefits differs among industry experts.
Some believe in keeping all your pension pots separate while others advise combining all benefits in one place. There are various factors to consider if you are thinking of combining your pension pots.
For ease of access, many believe combining all into one pension pot is best. However, different schemes may have different fees and charges. We have broken down some examples of how fees and charges affect your pension fund value.
What are the Advantages of Transferring Your Pension?
- Having all your benefits under one roof.
- Often have better communication and access to clinics.
- Potential drop-in fees/charges (although scheme dependant) and not always the case.
What are the Disadvantages of Transferring Your Pension?
- There is a risk the new scheme may underperform
- All eggs in one basket from a provider/fund point of view.
- Your old pension is now locked into your current employment. You must abide by these scheme rules with regard to any potential early access.
- Different rules with regard to fund passing to your estate on death. As an active member up to 4 times, your salary and the value of your contributions can be paid out as a lump sum. Anything over an annuity must be purchased.
Transferring to a PRB or BOB
If you have left a DC scheme, a pension transfer to a PRB of BOB may be on the table. We like to take a jargon-free approach around here so let us break down the acronyms.
A Buy-Out-Bond is also known as a Personal Retirement Bond. Their purpose is to receive a lump sum from your former employer’s occupational pension scheme.
It is worth noting that these are single premium accounts. Receiving the transfer is their sole purpose. Further contributions are not permitted.
Transferring to a PRSA
A Personal Retirement Savings Account (PRSA) gives you another pension transfer option. This is an account that will be held independently in your own name. However, your employer will also have the ability to contribute.
Having the policy in your own name will also give you full control over fund choices. However, it is worth noting PRSA’s tend to be more expensive than occupational schemes.
It is worth noting that a Certificate of Benefit Comparison and written statement is required if you want to transfer from an occupational pension scheme to a PRSA.
Transferring from an occupational pension scheme to a PRSA is only allowed if the member has less than 15 years of service with the associated employer and/or:
This Certificate of Benefit Comparison is and written statement are not required where:
These situations can be tricky so be sure to get some advice before making a decision.
Our final option is for deferred members. Essentially, this means you leave your benefits as is.
Although, you are at the mercy of how the fund performs and benefits may go down as well as up. Further contributions are not permitted.
Once at retirement, you will be eligible to access your benefits the same way as you would with a normal pension. For example, tax-free lump sum followed by purchasing an annuity or investing into an AMRF.
Defined Benefit Pension Schemes
If you were part of a Defined Benefit (DB) Pension scheme in your previous employment you are familiar with how they work.
But, we will break it down to ensure clarity.
DB schemes or ‘final salary’ as they are also known, pay out a regular income at retirement. The calculation will be a combination of your years of service and income at retirement.
An actuary will calculate benefits on behalf of the scheme administrators.
Final Salary/DB Scheme - Calculation Example
A Defined Benefit scheme may provide earning at retirement a pension of 1/60th of the final salary for each year you were part of the scheme. For example, if you retire after 30 years of service you may receive a pension of 30/60ths which would half of your final earnings before retirement.
Predicting future salaries is impossible which makes forecasting difficult.
It is also worth noting that these benefits are not guaranteed. Benefits are a promise rather than a guarantee.
If the scheme is not in a position to meet benefit demands there may be a shortfall.
Deferred Members of Defined Benefit Schemes
Deferred members are previous scheme members who have left employment but have not yet reached retirement.
You do have the option of staying as a deferred member which can be beneficial. However, it will depend on some variables.
- Is the scheme in a good position?
- Are there increasing liabilities?
- Is the employer committed to funding the scheme long-term?
- What is the number of people currently retired and drawing from the scheme?
These are just some of the questions you should ask yourself or an advisor if going the deferred member route.
Again, remember the regular payments of your benefits into retirement is a promise rather than a guarantee. It will be dependent on a combination of the above factors as to whether your former employer delivers on the promise.
If not, you could find yourself in a tricky situation.
Risks to Deferred Members of Defined Benefit Schemes
You can see by now that there are some aspects to weigh up as a deferred member. There could also already be a huge amount of deferred members currently drawing down benefits.
This will also affect funding and potential liquidity issues. Just ask yourself in an objective manner “what are my chances of receiving my full benefits at normal retirement age?”.
The main risks to consider are:
- The scheme trustees could decide to reduce the deferred pension before you reach retirement age
- Trustees could reduce pension benefits payable at retirement age
- The scheme could wind up before or during your retirement.
We are not trying to persuade you into any course of action. The aim of this blog is to help you assess your pension options. A pension transfer could be a viable option.
Whatever your thought process, enlist the help of an expert and take time before deciding.
Dying as a deferred member of a Defined Benefit Scheme
On death as a defined benefit member, your spouse may be eligible for a 50% payment. However, if you die as a deferred member, this is where things may get messy.
It depends on the scheme rules, but if you die as a deferred member, your estate may not be entitled to inherit your benefits.
This is why it may be worth assessing your options regarding a pension transfer.
Transferring out of a Defined Benefit Scheme
Perhaps look at a transfer value from the Defined Benefit scheme. You could put your benefits into a Buy-Out-Bond, which would be a policy in your own name.
With the costs of administration and running Defined Benefit schemes on the rise, many companies also offer Enhanced Transfer Values (ETVs). This may give you the opportunity to get a higher value than what is currently available in your fund.
This route of opting for an ETV, Buy-Out-Bond, and the remainder into an AMRF/ARF will give you full control. The policy will then be in your name and you can control the fund choices and investment decisions.
On death as a member of a Defined Benefit scheme may entitle your spouse to a 50% payment. On death in a Buy-Out-Bond, the entire sum passes to the surviving spouse.
It is worth noting this approach is also not risk-free. You could invest your benefits into funds that may underperform. There is also a chance the fund may run dry over a period of time.
There is no universal answer and each person has different circumstances. Be sure to discuss your options at length and ensure you make the correct choice for your situation.
Case Studies - Pension Transfer Options
Below we go through some examples of different options that may be available. Depending on your situation and scheme rules, certain pension options may be applicable.
Case Study 1- A former member of a DC Scheme
Name | Eoin
Age | 54
Eoin worked for a large multinational company in Dublin for 14 years. Two years ago the company relocated to Eastern Europe. Eoin is now working for a different company and is looking to assess his pension options.
He was part of the company’s Defined Contribution pension scheme where both he and his employer contributed over the 14 years. His fund value is currently at €240,000.
After seeking advice, Eoin decided to transfer his benefits into a Buy-Out-Bond (PRB) in his own name. Eoin then accessed 25% (€60,000) of his benefits tax-free.
He then invested the next €63,500 into an Approved Minimum Retirement Fund (AMRF) and the remaining €116,500 into an Approved Retirement Fund (ARF).
Eoin now has full control over his fund choices and investment decisions
Case Study 2 - A former member of DB Scheme
Name | Pauline
Age | 50
Pauline has worked for an industrial firm in her local town in Monaghan for the past 25 years. However, 4 months ago she changed employment.
Pauline was part of the company’s Defined Benefit scheme for 23 years of her service. Waiting to access benefits at retirement age is a worry.
The company is currently experiencing liabilities within its Defined Benefit scheme. Pauline is considering a pension transfer. The company also offered €445,000 as an Enhanced Transfer Value (ETV).
Due to a combination of the ETV and the company’s liabilities she has decided to transfer her benefits into a Buy-Out-Bond.
Pauline is taking 25% of her benefits tax-free (€111,250) and purchasing an annuity with the remainder.
An annuity will give Pauline a guaranteed income and peace of mind. The above scenarios illustrate different options available and how personal circumstances will play a huge role in your decisions.
Whether you were in a DB or DC scheme, ensure you assess all your pension options before making a decision.
If you would like to speak to one of our team, we would be happy to help.
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*This blog should be used for information only and not taken as financial advice.