COVID-19 has forced many of us to sit back and reassess our financial situation as many people have been made redundant or are forced to look at other employment opportunities as a result of the pandemic. This not only has an impact on our short-term financial plans, but it will have a knock-on effect on our retirement plans also.
When we change employment, whether it be by choice or imposed on us by redundancy, we often forget to look into the options for the pension that we have built up through that employment. More frequently, we are now meeting clients who have reached retirement and have multiple pensions from multiple employments and often times, we even find another pension from an old employment that a client has forgotten about!! Because we typically can’t access the money in our pension until we retire, its often pushed to the back of our minds.
What’s wrong with leaving my pension in my old Company Scheme?
Well, it is something that you can certainly do, but there are a few caveats that I’d like to make you are of:
As mentioned – you might forget about it! Once you leave employment, the Trustees of your Company Pension scheme are not obliged to keep in touch with you. So, if you move home and forget to notify the company managing your pension, you won’t receive your annual pension statement. Meaning, when it comes time to retire and a few years have passed, you may forget you even have that pension.
Control of your pension remains with Company Scheme Trustees, unless you move it. This means, they not only have control over how your money is invested and what risk is taken with your money, but they also control when you can access your pension!
When it comes time to retire and you need to access your pension, if the company you worked for has closed or changed ownership, you may find it quite difficult to track down the pension scheme Trustees to get them to sign off on your pension withdrawal. If you can’t locate them, it may take up to 2 years before you can claim your pension benefits and you will have to apply to the Irish Pensions Board for approval.
If you pass away before retirement, there are rules in place that govern how your pension is paid to your estate. Under these rules, the pension will not necessarily be passed tax free to your next of kin, as a single lump sum. A portion of it may be paid tax free to your estate or next of kin, with the balance used to buy a monthly pension for life, which would be subject to income tax.
While it’s great that your employer is facilitating and contributing to your retirement plan, as a member of a Company Pension Scheme, you must make yourself aware of how this impacts your retirement plan should you leave the scheme.
What options do I have with my Company Pension then?
As a general rule of thumb, it is more advantageous for you to transfer your Company Pension benefits out of the scheme and into your own name, if you are changing employment. The benefits of transferring the pension benefits out of the Company Scheme and into your own name are:
Control of the fund; where and how the money is invested and also, the level of risk taken with your money
Access to your benefits; at retirement, or earlier in some circumstances, without needing permission from the Company Scheme Trustees
Estate planning; it may be more beneficial for your next of kin, if your pension benefits are in your own name, rather than a scheme, should you pass away
A more comprehensive financial review and retirement plan, if all of your pensions are through one Financial Broker.
So, what are your options with your Company Pension if you are changing employment?
Refund of contributions – if you have less than two years’ service in the pension scheme, you may be entitled to a refund of your own contributions. The contributions paid by your employer, will be returned to them
Transfer to a Personal Retirement Savings Account (PRSA) – if you have less than 15 years’ service in the pension scheme, you can choose this option. A PRSA will allow you to continue to save for retirement, in one account, that you can take with you throughout multiple employments. Should you pass away, a PRSA is also transferrable to your estate/next of kin, as one lump sum – there will be no obligation to buy an income for life. You will also gain full control over how your pension is invested and you may be able to access your benefits from age 50 onwards, subject to certain criteria.
You can transfer to a Buy Out Bond – A Buy Out Bond has a number of features that make it a very attractive option for employees changing employment. As with a PRSA, you now have full control over your pension, how it’s invested and the level of risk you take. You will also have the option to access your benefits from age 50 and it is transferrable to your estate/next of kin as one lump sum in the event of your death.
Some of the features of a Buy Out Bond that make it an attractive option for employees changing jobs are:
There are no restrictions around service. Regardless of how long you were in your employer pension scheme, you have the option of transferring to a Buy Out Bond
Once you are invested in a Buy Out Bond, you cannot add extra contributions. However, this can be an advantage! If you have multiple employments that result in you taking out more than one Buy Out Bond, then you have a number of pensions that you can access, if needed, at different stages of your life, from age 50 onwards.
TAX FREE CASH! A Buy Out Bond has a feature that allows you to ‘ring fence’ your tax free cash entitlement, to try exceed the amount that you are normally allowed to take tax free from the scheme. This is known as ‘commuting’. Currently, under this Revenue rule*, if for example, you are allowed €50,000 tax free from your scheme under normal circumstances, but you leave service, deciding to commute your tax free element using a Buy Out Bond, and at retirement it has grown to €65,000, then you are now entitled to €65,000 tax free!