You have decided to make a career change or take a redundancy offer but can’t help but ask, ‘When I leave employment what happens to my pension benefits?’.
When leaving your job, apart from the small matter of securing your financial future, what to do with your pension benefits is one of the most important things you need to consider. This can be especially so if you and your employer have been diligently contributing to your pension scheme for many years!
Key Takeaways of This Post:
- Beware ‘Advisors’ that tell you to move it, without due analysis to ensure it is best for you
- You will have 3 main options for your pension benefits when leaving employment
- You are entitled to an option statement after leaving, it’s important to know what it means
- If it is a good idea to combine multiple older pensions into one scheme
Beware ‘Advisors’ that tell you to move your pension, without due analysis
In fairness, most advisors I have encountered over the years have clients’ best interests on their radar. There are still a fair number, however, who don’t. And quite often these are high profile firms who have good PR teams in place to create positive spin about them!
If you approach 100 different financial advice firm with the question ‘When I Leave Employment What Happens To My Pension Benefits?’, you might get many different answers. Beware a firm that advises you to move your old pension to their ‘wonderful’ products without them having at least done due analysis to ensure it makes sense, for you!
When you recognise that approximately 99% of advice firms are only paid when/if you move your pension scheme to their products. You can see why they may be very determined and adamant that you should do so.
When you leave employment, in the vast majority of cases, if you do nothing, your pension will remain invested there, until you say otherwise. Despite an unscrupulous ‘advisors’ protestation, moving your old pension when you leave employment is only 1 of the options open to you. Let’s dig in.
Three Pension Benefit Options When Leaving Employment
The Pensions Authority state that there are three main options when leaving employment, which we’ll talk about more below. I suggest that you will need to carefully consider your pension plan options when leaving a company. Depending on your own circumstances, one option may be more beneficial, but each will have its own pros and cons.
Your main options are:
- Leave your pension benefits where they are
- Transfer your pension
- Get a refund for your contributions
Option 1: Preservation of Pension Benefits (Leave pension where it is)
This is the easiest choice, with the least amount of hassle!
Under the 1990 Pensions Act, employees with at least two years of pensionable service with a company are entitled to leave their occupational pension benefits within the occupational scheme until they decide to move them or retire/draw benefits. They should continue to remain invested in the funds and per the investment strategy chosen. When you want to draw benefits, you simply request a ‘Retirement Options’ form, and select the option most suited to you from those available.
This is also known as a ‘deferred benefit’. The Occupational Scheme is obliged to maintain your benefits when you are no longer an employee.
However, while this is the simple choice, there are some potential cons you need to consider.
You might be surprised to learn that while the scheme is required to maintain your benefits after you leave, they are under no obligation to continue engaging with you on the status of your fund.
A related potential issue is the actual fund performance. It never ceases to amaze me the poor fund performance that many large pension scheme members have to put up with. If you are a member of an occupational pension scheme, you are restricted to investing only in the funds that the scheme has chosen.
More often than I would like to see, these funds underperform the benchmark. All too often, they haven’t delivered the same returns as comparable pure index. Comparing large scheme fund performance to the likes of Vanguard, Dimensional or BlackRock is an interesting exercise.
Recently I have seen several cases where pension holders (with 7-figure pension pots) were invested prudently in their old scheme insurance-based equity funds. When analysed, those funds were underperforming a pure index by 3-4% each and every year. That 3-4% differential might not sound like much, but it is a potentially life-changing sum of money over the longer term for many of us.
That’s not to say that you should move your scheme, however. I have also seen cases where people were advised to transfer their scheme to an ‘advisors’ wonderful products’, whereby they ended up in a fund/product that delivered less than they would have gotten had they remained! Tread carefully.
Option 2: Transfer Your Pension
Another option to consider for suitability when asking ‘when I leave employment what happens to my pension benefits’ is that of transferring your pension out of the company scheme. You can potentially transfer your pension to a Personal Retirement Savings Account (PRSA), a Buy Out Bond (BOB), or to the occupational scheme of a new employment.
Which option is best will depend on the current scheme rules and your priorities as per your financial plan.
If you take your benefits to your new employer, it is a way to keep some control and keep your funds together for administration purposes. However, caution is needed here as not all schemes allow this, and changing jobs again in future will force you to make this decision all over again.
You also still don’t have as much control as you would with the option of moving your benefits to a PRSA or BOB.
The purpose of a BOB (Personal Retirement Bond) is to hold pension benefits related to company scheme in which you are no longer a member. In choosing a BOB, you put these benefits in your name and under your control. While doing this will open options when it comes to how your funds are invested and potentially lower fees, you can make no further contributions into a BOB. It is essentially a ring-fenced pension account for future draw-down.
PRSAs have a number of benefits in addition to taking control of your pension. If you have a relatively large scheme value, you can split it between more than one PRSA. In so doing, you can access each one independently as you need it, and can be very tax efficient when you start drawing income.
You can also make additional contributions to a PRSA going forward. Our Blog 199 talks more about the specifics and pros and cons in moving company pensions to PRSAs.
As will hopefully be clear by now – transferring your old pension benefits when you leave employment may or may not be the right thing to do. It all depends on what choice, fee, performance and flexibility the current scheme offers, versus a potential new scheme you might move to.
Option 3: Get a Refund of Your Contributions
While this option isn’t particularly appealing, it is still important that you know everything that is open to you before deciding.
If you have less than 2 years’ service, the employer can insist that you are given a refund of your contributions to the scheme (no refund of employer contributions!). Even if the employer doesn’t insist on it, you can request a refund of your pension contribution. Again, you will only get back what you put in, not what your employer contributed on your behalf. And any refund is also subject to tax at the standard rate (20%), seeing as you would have gotten tax relief on what you put in!
A Side-Bar: Should I Consolidate Old Pensions or Not?
‘When I Leave Employment What Happens To My Pension Benefits?’, is usually followed by ‘Should I consolidate my old pensions?!
Firstly, if you want in-depth info on this, please read my Blog 181 from 2021.
Ultimately, a lot of the factors to consider are the same ones as I address in this post. It depends on the fee, performance, and flexibility you gain or lose in doing so. Many people want to do so simply to reduce their admin and hassle in having multiple schemes.
However, depending on the amounts, and the merits of the various schemes, it may make sense to retain multiple pots. Multiple pots can allow far more flexible access to tax-free lump sums and/or income streams from multiple pots in the future.
Final Thoughts on ‘When I Leave Employment What Happens To My Pension Benefits‘
As you see, this isn’t always a very straightforward choice. The easiest or most convenient choice isn’t necessarily the best one.
When they leave employment, many people choose to do nothing. They leave things as they were. Sometimes that will work out OK. Other times, it can be a costly mistake as a result of high fees and/or poor fund performance. It is helpful to have a solid financial plan, and to conduct a thorough analysis of the pros and cons of any decision.
Your future self might thank you for it!
I hope it helps,
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