Taking break in employment - options for occupational pension

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gnf_ireland

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My wife decided to take a break from employment just before the COVID19 crises kicked in. This was due to a number of reasons and was the right time for us as a family. We had originally considered taking about 6 months break before looking for a few role, but realistically now given everything that has happened it could end up being 18-24 months.

She has been paying 17.5% of her income into her pension for the last few years, and then we top it up by the remaining allowable 7.5% after the year end in a single contribution. We have not yet done this for 2019.

Yesterday she got the letter from the provider giving her the options of deferring benefit or transfer value to another pension scheme, personal retirement bond or scheme she is about to become a member of. Since she is not planning to work for a bit, we think leaving it where it is is the best option for a while - so choosing deferred benefit.

The questions I have are:
(a) can we add additional funds into the policy (ie the 2019 top-up if it is classified as a deferred benefit) ?
(b) any downside we might not be aware of in leaving it as a deferred benefit, until she joins the workforce again and transfers the pension pot to the new occupational pension on offer?

Thanks in advance
 
Your wife’s decision ultimately boils down to how much control she wants to have over her fund.

if she has left her employers scheme then she wouldn’t be able to make contributions into it again as a deferred member.

I posted this before but it’s relevant for those wondering what to do when they leave employment and wondering about downsides as you’ve mentioned.

What to do with your pension on leaving employment.

Option 1: Leave Your Pension Where It Is

Advantages;
  • Charges are likely to be lower in a large group scheme
  • Benefits can be accessed at 50 with permission from both the employer and scheme trustees.
Disadvantages;
  • Any retirement options, including early retirement, are bound by scheme rules and require permission form the trustees.
  • Large schemes have limited investment options since they’re built for groups of employees, not individuals.
  • Trustees are not obliged to keep in contact with deferred members.
  • If the scheme is closed you could lose your accumulated rights if you are transferred out to a PRSA instead of the current PRB option.

Option 2: Transfer Your Pension into a Personal Retirement Bond (PRB)

Advantages;
  • Full cash value is held under one single premium contract that is owned by you personally.
  • Your accumulated rights are preserved i.e. all salary and service details are recorded which maintains your rights to the ‘lump sum only’ option.
  • You can access your benefits from a PRB from age 50.
  • You have full control over your money and the investment decisions.
  • You can design a personalised, risk tailored portfolio that suits your tolerances, risk profile and long term growth goals.
Disadvantages;
  • The annual management charges tend to be higher depending on the funds and/or assets chosen.

Option 3: Transfer Your Pension Into Your New Employers Pension Scheme

Advantages;
  • You maintain full active control over your entire pension fund.
Disadvantages;
  • You could lose all the accumulated rights of salary and service built up in that scheme.

So what should you do?
In most cases the best option will be the Personal Retirement Bond (PRB) since it;
  • Maintains all of your accumulated benefits related to your salary and service.
  • Allows you to manage your investment strategy
  • Gives you complete control over your asset.
A Personal Retirement Bond allows you to assume ownership of your investment so you can manage it effectively, monitor how it's doing and make changes if required so it gives you complete control.

Kevin
www.thepensionstore.ie
 
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You don’t need to rush into a decision . You can leave it with the previous employer pension scheme until you investigate your options .
Also , Kevin’s opinion that the best option is a PRB in most cases is only true if the disadvantages of the leaving it where if is actually do outway the extra costs of a PRB.
In my case, for example , I’ve been happy to leave it where it is.
I won’t need to access it before 65, and the range of funds available meet my needs at a low cost.
 
kevhenry said:
Option 3: Transfer Your Pension Into Your New Employers Pension Scheme

Advantages;
  • You maintain full active control over your entire pension fund.
Click to expand...
I think you're missing 1 key advantage here. I could be completely wrong, but I understood that say for example you had 5 years with previous employer, and if your new employer allows you to transfer it into their pension, then you've already met their 2 year criteria to keep any employee contributions? So if you leave the new job after a year you keep the employer contribution?
 
huskerdu said:
You don’t need to rush into a decision . You can leave it with the previous employer pension scheme until you investigate your options .
Click to expand...

Do you know if we can pay the top-up for 2019 before making any decision so at least we can take that part off the table? I will check with Zurich in any event, but it would be good to know

Do you know if we can select the deferred benefit option, and at a later stage transfer it out once my wife returns to work?

She is lucky in that the scheme does support early retirement from 50, so that is not a consideration in the decision.

Any idea of the approximate cost of a PRB for approx 100k pension pot?

Finally, as we are both directors in my company, is there any merit in discussing the possibility to merging my pension and hers into a single self-administered pension and working it from there? Is this something that is even worth considering as an option? Both policies combined are around 450k taking into account the recent drop in the markets. I am avoiding going in to look at my actual values :)
 
She can pay her lump sum contribution for 2019 into a PRSA or into an exec scheme if she has one set up through your limited company. As can you.

Leaving everything as a deferred benefit is the default option so if she doesn’t give an instruction then her money will remain invested until she takes it. In other words, she doesn’t have to make a decision now as all the options mentioned earlier will still be an option in the future as long as PRB‘s are still available.

There was a very active ‘pensions simplification‘ agenda which was, amongst other things, proposing to ’declutter’ the market by phasing out PRB’s and personal pensions/RAC’s. However, the heat has been taken out of this in recent times with both the change in government and everything else that’s going on in the world.

Depending on what she’s looking for the base annual management charges on a PRB can start from 0.4% and up.

You could both initiate self-administered schemes through the company but not merge two individually held pension funds into one single plan.

Kevin
www.thepensionstore.ie
 
Kevin, I don’t know where you’re getting the idea that the benefits can’t be accessed until age 65. The person had left employment, so it would be from age 50. I agree that a PRSA would be a good idea for the final 2019 contribution.
 
Sorry, yes as she's left employment she could take benefits at 50 but the ability to do so would still at the discretion of both the employer and scheme trustee. Thanks for the spot, I will amend.

Kevin
www.thepensionstore.ie
 
kevhenry said:
Your wife’s decision ultimately boils down to how much control she wants to have over her fund.

if she has left her employers scheme then she wouldn’t be able to make contributions into it again as a deferred member.

I posted this before but it’s relevant for those wondering what to do when they leave employment and wondering about downsides as you’ve mentioned.

What to do with your pension on leaving employment.

Option 1: Leave Your Pension Where It Is

Advantages;
  • Charges are likely to be lower in a large group scheme
  • Benefits can be accessed at 50 with permission from both the employer and scheme trustees.
Disadvantages;
  • Any retirement options, including early retirement, are bound by scheme rules and require permission form the trustees.
  • Large schemes have limited investment options since they’re built for groups of employees, not individuals.
  • Trustees are not obliged to keep in contact with deferred members.
  • If the scheme is closed you could lose your accumulated rights if you are transferred out to a PRSA instead of the current PRB option.

Option 2: Transfer Your Pension into a Personal Retirement Bond (PRB)

Advantages;
  • Full cash value is held under one single premium contract that is owned by you personally.
  • Your accumulated rights are preserved i.e. all salary and service details are recorded which maintains your rights to the ‘lump sum only’ option.
  • You can access your benefits from a PRB from age 50.
  • You have full control over your money and the investment decisions.
  • You can design a personalised, risk tailored portfolio that suits your tolerances, risk profile and long term growth goals.
Disadvantages;
  • The annual management charges tend to be higher depending on the funds and/or assets chosen.

Option 3: Transfer Your Pension Into Your New Employers Pension Scheme

Advantages;
  • You maintain full active control over your entire pension fund.
Disadvantages;
  • You could lose all the accumulated rights of salary and service built up in that scheme.

So what should you do?
In most cases the best option will be the Personal Retirement Bond (PRB) since it;
  • Maintains all of your accumulated benefits related to your salary and service.
  • Allows you to manage your investment strategy
  • Gives you complete control over your asset.
A Personal Retirement Bond allows you to assume ownership of your investment so you can manage it effectively, monitor how it's doing and make changes if required so it gives you complete control.

Kevin
www.thepensionstore.ie
Click to expand...


I'm not mad about this commentary and believe that it is not objective.

To illustrate, I have detailed below my comments in relation to option 1 and could post additional critical comments in relation to options 2 and 3 if required. My comments are in bold italics....

********************************

Option 1: Leave Your Pension Where It Is

Advantages;
  • Charges are likely to be lower in a large group scheme
  • Benefits can be accessed at 50 with permission from both the employer and scheme trustees. This consent caveat can be easily avoided by transferring out just before retirement. In any event, the decision to allow an individual take his benefits from within the scheme is unlikely to be an employer’s decision. Normally, the early payment of a deferred pension is a trustee decision. Remember, trustees are obliged to act in the best interests of members so hard to see any issue here at all. Even if the employer was involved, in most large schemes deferred members are really not attractive to employers as for large plans, the employer normally pays the admin costs and could have heavy enough expenses trying to trace former members at some future date. So, I can't imagine any employer having much motivation to "lock" a deferred member in!
Disadvantages;
  • Any retirement options, including early retirement, are bound by scheme rules and require permission form the trustees. We are talking about a DC plan – in what practical way could this be an issue?
  • Large schemes have limited investment options since they’re built for groups of employees, not individuals. I would have thought that very many large schemes would have high grade investment options. Why would a large company – with all its clout – accept inferior investment solutions than apparently available to Joseph and Josephine Soap?
  • Trustees are not obliged to keep in contact with deferred members. What’s the big deal? Don’t many schemes have on-line access for deferred members? Even if not, can’t the deferred member contact the trustees? But why is this even required – won’t the value of one’s fund be the number of units by the unit price (which should be readily available) – less whatever admin charge applies (usually nada).
  • If the scheme is closed you could lose your accumulated rights if you are transferred out to a PRSA instead of the current PRB option. No idea what this means. In any event, schemes just don’t close in a heartbeat – there is an obligatory lead-in time where all the "transfer out" options are giving to members. Only where members fail to exercise an option are such members “defaulted” somewhere.
 
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I have subjective objectivity since I’ve met with plenty of people over the years who, from advice received at the time they were faced with this decision, didn’t come out of it as well they might.

It can be argued that some of these are trivial but all are included based on real world experiences I’ve seen others have and, while some may be easier to deal with than others for someone who knows what they’re doing, this doesn’t mitigate their relevance as a consideration.

Not everyone knows this stuff, hence the reason why forum’s like this exist, and real-life situations are not always as cut-and-dried so as to fit neatly into prevailing rule sets.

I stand over my position that, all things being more or less equal, having personal control over ones assets is best.

Why have any external constraints, regardless of whether they’re perceived as easy or not to overcome in the short-term, when they don’t need to be there at all. The future is unpredictable and things can change so I believe it’s better to be in a position of control than not in my humble opinion.

Besides, most people don’t want the hassle of having to chase down trustees (which many wouldn’t be aware they need to do and which I have to do all the time and it’s no picnic) or have other decisions made on their behalf that may materially impact them in future.

Naturally enough, the underlying assumption is that PRB’s are inherently the more expensive option which is my driving my position. Personally held contracts usually are but that doesn’t make it a universal truth since there are plenty of charge-heavy group schemes and corporate schemes in existence.

Of course, if a decision is being based on charges alone, then one won’t know the best course of action until a relative cost comparison is made.

And my experience of group schemes is not that they have inferior investment options but that they are, by virtue of having to cater to larger groups of people spanning the age spectrum of 18 to 65, more constrained in the breadth of options they can offer their employees.

Again this is a generalisation not an absolute truth.

Kevin
www.thepensionstore.ie
 
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Kevin,

Let's face it - it's not surprising that you disagree?!

What do these two disadvantages precisely mean?

1. Any retirement options, including early retirement, are bound by scheme rules and require permission form the trustees
2. If the scheme is closed you could lose your accumulated rights if you are transferred out to a PRSA instead of the current PRB option
 
elacsaplau said:
Kevin,

Let's face it - it's not surprising that you disagree?!

What do these two disadvantages precisely mean?

1. Any retirement options, including early retirement, are bound by scheme rules and require permission form the trustees
2. If the scheme is closed you could lose your accumulated rights if you are transferred out to a PRSA instead of the current PRB option
Click to expand...

1: Many of the older trust deed & rules that govern schemes (primarily DB schemes) have some very restrictive rules built into them. For example the ILCU scheme does not permit early retirement & the CWPS scheme benefits can’t be drawn before age 60. These rules apply to any benefits transferred to a PRB from either of these schemes.

2: If trustees decide to close down / wind up a scheme the deferred members have to be transferred somewhere. The choices available to the trustees are PRSAs & PRBs. Not all trustees will choose the PRSA route as doing so removes the options for the member to take tax free cash benefits on the salary and service basis. In my experience most go the PRB route. There are other reasons why the trustee may look at the PRSA route for what they consider to be in the best interests of the member.
 
@gnf_ireland Is there a chance your wife will rejoin the employment of the company related to the scheme again in the future?

Am I correct in assuming that the employment you are referring to is different to her being a director of your company?
 
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@Smoneen highly unlikely she will rejoin the company as the place is a basket case these days. But like many in the current environment, there is always an element of never say never !!

Yes, this is separate to her directorship of the company - which is currently unpaid and she has no pension with.
 
Smoneen,

I note that you are answering for Kevin?!

I think that your first point is irrelevant as we are talking about DC plans generally and your second point does not address my question.
My question remains valid as does my original comment, in this regard, below.

If the scheme is closed you could lose your accumulated rights if you are transferred out to a PRSA instead of the current PRB option. No idea what this means. In any event, schemes just don’t close in a heartbeat – there is an obligatory lead-in time where all the "transfer out" options are giving to members. Only where members fail to exercise an option are such members “defaulted” somewhere
 
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gnf_ireland said:
@kevhenry @elacsaplau Thanks for the commentary above. I am sure there is devil in the detail in 1% of cases which make things tricky or changes kick in later that make decisions more complex.
Click to expand...

Absolutely! From this distance, all one can answer is the smart general play. My purpose in contributing to this thread was to give the alternate view. The real question is why do you think my advice differs from Kevin/Smoneen?
 
The pension simplification agenda was very topical last year and the arguement from the industry was that the proposal to blanket remove PRB’s from the market would unfairly disadvantage deferred members where a scheme is being closed in their absence.

In that scenario, and without a PRB to transfer out to, a deferred member being moved from a scheme would not be able to preserve their completed salary and service details under an independent, personally held contract.

PRSA’s don’t record salary and service details and there was no suggestion at the time that this functionality would be introduced.

Things change, as I said, and lots of things were topical at that time. However, I suspect they will all, much like the auto-enrollment agenda, be postponed indefinitely with the new world we're all in.

That said, until it’s off the table it’s still a risk factor.

Kevin
www.thepensionstore.ie
 
I’ve been asked by friends and family to take a look at this from time to time. I find the hurdle quite high in terms of leaving the old group scheme rather than remaining as a deferred member.

The fees tend to be very low in the group schemes because you’re leveraging everyone’s buying power. The investment options tend to be fine, with decent all-equity and lower equity plus cash options. Death-in-Service is no longer an issue as the value is paid out in full to the estate of the deceased. And early access (i.e. from 50) has always been possible in any one I’ve ever seen.
 
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