Merge DC pensions - costs\benefits?

[Truffade]

Financial details below:

Current age: 47
Salary: 129k (private sector)
Length of service: 3 years
Pension type: Defined Contribution

• Pension contributions:
• I contribute 20% (so still just under the 115k ceiling y about 2k)

Company contributes 10%
Current value of pension: 142k

I am also a deferred member of my previous employer's DC scheme
Current value of pension: 440k

The question is a simple one - should I transfer the 440k in my old pension scheme across to my new employer's one and combine them?

Intuitively this seems like a sensible thing to do, especially from the perspective of pensions planning and projections.

Not a pensions expert however so question is - Am I missing any potential angles here or should I just go ahead and do it?

 

[AAAContributor]

A couple of things to consider:

1. You are 47. If you transfer your old scheme across, you lose an access point. This could become available to you potentially from age 50 if required. If you transfer into the new employer scheme, you can only access it at the normal retirement age of the new scheme (assuming you remain on until that age).

2. You can't reverse the decision - you can always transfer at a future stage.

3. If you were to receive a severance payment in the future from your current employment, the potential amount you could realise tax free could be reduced by transferring in your old pension scheme with the current one as the actuary will calculate a larger pension lump sum due to you from that (your current) employment. I believe there is a way to circumvent that issue but it can be avoided in the first place by keeping your old scheme separate.

4. There's a potential for any death benefits to be maladministered. Currently, 100% of your old pension scheme can be paid out on death as a lump sum. If you transfer into the new scheme, the transfer in should also be payable as a lump sum but if the transfer is not recorded correctly, it could get lost in the mix.

5. The potential benefits of transferring is that your pensions are consolidated and simplified. Perhaps your new scheme has better charges and investment options?

I'm not a financial adviser or work in the pensions area so double check the points above with whoever you use.

 

[Truffade]

A couple of things to consider:

1. You are 47. If you transfer your old scheme across, you lose an access point. This could become available to you potentially from age 50 if required. If you transfer into the new employer scheme, you can only access it at the normal retirement age of the new scheme (assuming you remain on until that age).

2. You can't reverse the decision - you can always transfer at a future stage.

3. If you were to receive a severance payment in the future from your current employment, the potential amount you could realise tax free could be reduced by transferring in your old pension scheme with the current one as the actuary will calculate a larger pension lump sum due to you from that (your current) employment. I believe there is a way to circumvent that issue but it can be avoided in the first place by keeping your old scheme separate.

4. There's a potential for any death benefits to be maladministered. Currently, 100% of your old pension scheme can be paid out on death as a lump sum. If you transfer into the new scheme, the transfer in should also be payable as a lump sum but if the transfer is not recorded correctly, it could get lost in the mix.

5. The potential benefits of transferring is that your pensions are consolidated and simplified. Perhaps your new scheme has better charges and investment options?

I'm not a financial adviser or work in the pensions area so double check the points above with whoever you use.

Thanks AAA - all good points

(1) I can't see myself wanting to 'stagger' activation of pensions but it's a fair point and something I had not considered. I wouldn't have thought it makes much sense to activate a scheme while still being a higher bracket taxpayer anyway.

(2) Yes, understood. This would be irreversible and I would be fine with that.

(3) Interesting one. I did get a large-ish redundancy in 2012 so may be n/a for me in any case.

(4) Seems to assume a degree of incompetence on behalf of the scheme administrators! Surely I can check this upon transfer anyway and ensure the transfer was done correctly.

(5) They both have similar fee levels. The new one is showing better returns in the 3 years I have been in it but of course that may be due to higher risk in the portfolios.

Truffade

 

[PolkaDot]

Good to understand what management fees you are paying in each case. That could influence your decisions. Relatively high annual fees can be really detrimental to fund growth.

 

[Steven Barrett]

A couple of things to consider:

1. You are 47. If you transfer your old scheme across, you lose an access point. This could become available to you potentially from age 50 if required. If you transfer into the new employer scheme, you can only access it at the normal retirement age of the new scheme (assuming you remain on until that age).

(1) I can't see myself wanting to 'stagger' activation of pensions but it's a fair point and something I had not considered. I wouldn't have thought it makes much sense to activate a scheme while still being a higher bracket taxpayer anyway.

It may not be a case of accessing the pension early but being able to access it later. Having multiple pensions means you can draw down on one when you retire, take the tax free lump sum and ARF income from it and let the other ones continue to run, without the obligation of taking ARF income from it. You can then mature the second one at at later date, taking the tax free lump sum again and the new ARF income.

If you have a large enough pension pot, it can keep you out of the higher tax bracket for a while too.

I'd also look at fund performance. The returns of Irish Life are consistently below those of their peers, so you can be losing out on returns by keeping your money with them, even if it means investing somewhere with higher charges.

Steven
www.bluewaterfp.ie

 

[Gordon Gekko]

In my view, the bar for consolidating them is pretty high.

Rather than a question of “why wouldn’t you?”, it’s more a question of “why would you?”.

 

[Marc]

I set out in this analysis if one has current consumer debt/large mortgage is it better to pay these off with the lump sum at 50 rather than derisk the pension in the 10 years up to retirement into bonds and cash which have no prospect of any return currentlly.

Can I Access My Pension Early? - Everlake

Taking retirement benefits early is only suitable for a limited number of people and circumstances

globalwealth.ie

Marc Westlake
Chartered Certified and European Financial Planner
www.globalwealth.ie

 

[Truffade]

Thanks Steven

the investment managers for the old scheme are indeed IL, for the new it's Zurich.

Your thoughts there prompted me to jump in and do some analysis.

1. The asset allocation mix is the same on both: 60% passive equity, 40% active diversified
2. The AMC on the various funds is the same between ILIM and Zurich, give or take a basis point or two
3. The admin fees are basically the same on both schemes and have similar caps
4. The difference in return is significant

Based on this, it's fairly apparent that I am giving up returns by staying invested in the old ILIM scheme and should consolidate.

I think up to now I had mistakenly been thinking of the two schemes as fungible but even some basic analysis would have shown me they are not! Thank you very much for your help with getting me to think straight.

Truffade

 

[Truffade]

I set out in this analysis if one has current consumer debt/large mortgage is it better to pay these off with the lump sum at 50 rather than derisk the pension in the 10 years up to retirement into bonds and cash which have no prospect of any return currentlly.

Can I Access My Pension Early? - Everlake

Taking retirement benefits early is only suitable for a limited number of people and circumstances

globalwealth.ie

Marc Westlake
Chartered Certified and European Financial Planner
www.globalwealth.ie

that's an interesting one Marc - our mortgage is about 30% LTV so may not be applicable to our situation as we will pay it off in the normal run of things.

 

[Porcini]

I'd also look at fund performance. The returns of Irish Life are consistently below those of their peers, so you can be losing out on returns by keeping your money with them, even if it means investing somewhere with higher charges.

Presumably this is the actively managed component of the fund mix where Irish Life have been underperforming?

 

[Steven Barrett]

Presumably this is the actively managed component of the fund mix where Irish Life have been underperforming?

No, their index funds underperform. They don't use the MSCI World index as their benchmark, they use their own and even then, usually underperform their own benchmark. MAPS is another range of funds that they funnel people into and they underperform their peers too.



Steven
www.bluewaterfp.ie

 

[Truffade]

The transfer amount has been confirmed and should go through in the next few days.

I think all the arguments for and against consolidation were valid but the substandard ILIM returns swung the decision for me. Thanks to all on here for the advice as usual.