If I leave my job, what happens to my pension?
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, managing director, Insight Private Clients, offers a clear and concise guide to your managing your pension choices if you are changing employment.
Most of us are encouraged to commence or join a pension scheme at the earliest opportunity.
This is good advice, with those at or approaching Pension age strongly endorsing such a view. However, with a more mobile workforce, what happens to my pension should I leave employment is a question being asked on a more frequent basis.
If you are leaving employment and were a member of an occupational pension scheme, you may have a number of decisions to make regarding your accumulated pension benefits.
This piece outlines the decisions that you may be faced with and discusses your options. As always when dealing with pension issues, seek professional advice and make informed decisions.
On leaving service, you are entitled to your Leaving Service Benefit Options regarding what you can and cannot do with your accumulated pension funds.
You will receive this statement from the pension Scheme administrators/advisors which may be a number of weeks/months after the date you leave service. Within this statement it will break your entitlements/options into two categories, based upon your period of Scheme membership:
If you have more than two years pensionable service you will not be entitled to a refund of your personal contributions. However, you will be entitled to choose between:
Maintaining your benefits with the scheme;
or Transferring your benefits to:
A new employer’s Occupational Pension Scheme;
A Personal Retirement Bond;
Some individuals may be entitled to transfer to a PRSA. This option is restricted to those with under 15 years of Pensionable service with the employer or connected employer. If the value of your Pension is greater than €10,000 you will be required to pay for a Certificate of Comparison showing the pros and cons of transferring to a PRSA. A Certificate of Comparison can typically cost anything between €500 and €2,000 depending on the circumstances. A Certificate of Comparison is not required if the Pension Scheme is winding up.
If you have less than two years of service, you should have the following options:
Do nothing. Maintain holdings within old Employers Scheme as a Deferred Member. If your Scheme rules allow, you may be able to retain a deferred benefit, comprising the full entitlements arising from your own and your Employer’s contributions for your period of service.
Refund of your own contributions (though not your employer’s), which are taxable @20%. Certain rules apply to this option. (This option will only be available if the scheme rules permit rights in the first two years).
Transfer of your own gross contributions to:
Transfer Benefits to your new employer’s Occupational Pension Scheme;
Transfer Benefits to a Personal Retirement Savings Account (PRSA);
Transfer Benefits to a Personal Retirement Bond (PRB).
Defined Contribution Schemes, the more popular Occupational Pension vehicle, enables you to leave your Pension where it is if you are not eligible to take a refund. Your benefits will be based on the following factors:
• Your contributions up to the date of leaving service;
• Your employer's contributions up to the date of leaving service;
• Investment growth or investment losses up to the date you take your benefits less charges;
• The age at which you take your benefits;
• Annuity rates at the time that you take your benefits.
The last two factors will only be relevant if you choose to purchase a guaranteed income for life (an annuity) at retirement.
If you do not take a refund of contributions, you will retain the right to a Pension at Normal Retirement Age. Upon leaving, the ‘promised benefits’ will increase to take account of inflation, up to a maximum of 4%pa.
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.
There are several reasons why it may make more sense to leave your accumulated Benefits from a Defined Benefit Pension Scheme of a previous employer rather than to transfer to an alternative option.
As an example:
• Defined benefit Schemes provide more certainty of income at Retirement.
• Should a Scheme become insolvent, merit may exist to defer any action in the hope that future actions may be taken to improve that solvency. However, if you do decide to defer any action there is no guarantee that the existing entitlements will be maintained.
Transfer Options You may also transfer your Pension benefits elsewhere– for example to a new Occupational Pension Scheme or to a Personal Retirement vehicle. In deciding whether to transfer you may wish to consider the following:
• What are the initial & ongoings costs of Transferring your Fund elsewhere?
• What difference in Investment choices exist between the current Plan and the alternative?
• Simplicity. A preference may exist to combine your accumulated Pension holdings to enable you to keep track of them more easily.
• Flexibility of access to such Benefits Regardless of which option you choose, it is important to only do so in an informed manner, and to seek impartial advice.
For many, historical Pension holdings may exist outside of the State. The Irish Revenue will allow pensions from overseas to be transferred to an Approved Occupational Pension Scheme, Personal Retirement Savings Account(PRSA) or Buy-out bond(BOB) providing:
The transfer takes place before pension benefits under the overseas scheme come into payment;
The scheme member requests the transfer;
The rules of both the Irish and overseas scheme permit the transfer the trustees or administrator of the transferring scheme comply fully with any transfer rules, regulations or requirements in the other jurisdiction;
The Revenue authority in the State from which the transfer is made approves/permits the transfer;
The individual is an Irish tax resident.
It should be noted that the area of overseas transfers is subject to change and caution is recommended when reviewing the various options available under this heading.
In addition to the options detailed, you may also be entitled to take early Retirement if your benefits are in a company pension scheme. This may depend on the rules of your Scheme, on the consent of the Scheme Trustees, and (for defined benefit Schemes) whether the Scheme is solvent or not. However, except in circumstances of ill health, early Retirement is not possible before the age of 50.
Regardless of which option you chose, the important takeaway is to ask the right questions of your advisor. When we make assumptions we don't get a true understanding of such choices. This can mean that decisions, judgements and conclusions are made from the wrong baseline or by not understanding how deep the issue is of obtaining professional, impartial advice.