Key Post What to do with a pension fund from a previous employment

LDFerguson

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If you have funds in a pension scheme from a previous employment, you have several options. Not all of them will suit everyone, but they should be examined.

Early retirement
If you're over 50, you can take early retirement now. The term "early retirement" in this context only refers to the pension scheme monies - it doesn't matter if you're still working in another job. Or you may be able to draw the lump sum from the pension scheme now and defer taking the rest of your benefits until later, depending on the rules and type of scheme it was.

Defined Benefit (DB) schemes
If the existing scheme is a Defined Benefit (DB) scheme, offering a guaranteed pension at retirement, you need to think carefully before making a decision to transfer your fund out of it. One the one hand, by transferring out you are giving up the valuable guarantees forever. On the other hand, if the scheme itself is, or becomes insolvent in the future and is wound up, the guarantees will not be honoured anyway and you may get a much lower value later. Try to get an idea of the current solvency position of the scheme and the willingness and ability of the employer to continue to fund it.

Leave it Where it Is - Deferred Benefit
Unless the pension scheme is being wound up, you can choose to leave your fund in the scheme – sometimes known as a “deferred benefit”. If it’s a Defined Contribution (DC) scheme, it will continue to be invested as before. If it’s a large scheme, the charges on the funds may be lower than what you can arrange yourself as an individual. Find out what the charges are and what the fund choices are. You will need to make sure you always know how to contact the scheme trustees, now and in the future, as they are required to sign off on any transactions on your fund, up to and including retirement. The scheme trustees also have the right to move the funds from one provider to another without your consent.

Transfer to a PRSA
If you have less than 15 years' service, you can transfer into a PRSA. If the value of the fund is greater than €10,000, you will need to pay for a Certificate of Benefits Comparison to be drawn up by an actuary before you can transfer the fund into a PRSA, unless the pension scheme is being wound up. Such a certificate can cost around 1% of the fund value, with a minimum of €500.

Transfer to a Buy-Out Bond
You can transfer into a Buy-Out Bond (a.k.a. Personal Retirement Bond). There are pros and cons of PRSA vs Buy-Out Bond, mainly around when and how you can take your retirement benefits. A Buy-Out Bond offers you the exact same retirement options as the original pension scheme. You can “retire” a Buy-Out Bond from age 50 onwards, regardless of your employment status at that time. You can only retire a PRSA before 60 if you are retiring from PAYE employment at that time. There’s one exception - In the event of serious ill-health, you can retire either a Buy-Out Bond or PRSA at any time.

If appropriate, you can make additional contributions to a PRSA from future earnings. You can’t do that with a Buy-Out Bond.

Transfer to Current Employer's Pension Scheme
If you’re currently in an Occupational Pension Scheme in your current employment, you can transfer your fund into it. Before deciding to do this, find out the charges and fund choices on the old scheme, the charges and fund choices on the new scheme and compare them. Compare also the charges and fund choices on the new scheme with those available on a Buy-Out Bond or a PRSA.

If you transfer your fund from an old scheme into a new scheme, you are giving up your option to “retire” the two funds at two different times and instead are rolling them all into the new scheme.

Refunds of Contributions
If you have less than two years’ service in a scheme when you leave, you may be offered the option of taking a refund of the value of your own contributions, less tax. This is not really to your long-term benefit as the employer also gets a refund of the value of their contributions. If you transfer your fund from an old scheme into a new scheme, your service in the two schemes is added together for the purpose of calculating whether or not you would be entitled to a refund of the value of your contributions. Example – you spent 18 months in a previous scheme and then transfer your fund into a new scheme of your new employer. If you spend longer than 6 months in the new scheme and then leave you will not have the option to take a refund of contributions, as your combined service is greater than 2 years.

What Investment Funds?
Whether you choose a PRSA or a Buy-Out Bond, it is important to choose an investment that suits your requirements. There are a huge range of pension funds and choices available out there. As a starting point you and your advisor need to work out your risk tolerance (what level of risk would you be comfortable with) and your risk capacity (what level of risk can you afford to take). After that, there are a wide range of funds to choose from, to suit all risk profiles, from low-risk cash funds, fixed and variable rate deposits, through bond funds, commodity funds, equity funds, property funds, absolute return funds, mixes of all these and more. It's also possible to set up self-directed Buy-Out Bonds and PRSAs that will allow you to choose your own shares, ETFs, deposits or even property to buy using your pension funds. Only some of these will be suitable for any given individual, but you can't make an informed decision until you know what the choices are.

Be Aware of Charges
Charges can vary from one product provider to the next and also from one Financial Broker to the next - they are not standardised. Make sure you are aware of what the charges are - both up-front and ongoing - as they can have quite an impact on your fund over time. Ask for your advisor to explain the charges to you in Euros and cents and/or simple terms, not jargon. A good advisor is there to help you understand what you're investing in, not blind you with science and gobbledygook.

Liam D. Ferguson
 

MrEarl

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Hello,

Thank you for this information.

If I may, I would like to ask a couple of questions:

I am working and participate in my current employers Defined Contribution Scheme, where my contribution is suplemented by larger payment by my employer, each month. In addition, I make AVCs into this scheme.

I previously worked for another employer, where I am a member of a (now closed) pension fund. It is a Defined Benifit scheme where the former employer has closed it to both new members and new contributions, from all former members. The fund is however continuing and appears to be on target to meet it's obligations. I also made AVCs into this fund, during my time working for this employer.

What I would like to know is this please: Is it possible to transfer the AVCs from my former pension, into my current pension fund (without interfering with the Defined Benifit scheme) ?

Assuming the answer is Yes, I take it the considerations are similar to those flagged elsewhere - namely charges and possible investment options.

Suffice to say, my reason for enquiring about merging these two pools of AVCs, is I would like to avail of various investment options available through my current pension, which are not available through my former pension.

Thank you very much for your help.

Mr. Earl.
 

leroy67

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The below might help Mr Earl

The Revenue Commissioners treat a separate AVC scheme as if it were part of the main pension scheme, because an AVC arrangement cannot exist on its own.Therefore, the benefits of an AVC scheme must be dealt with in the same way as the benefits emerging from the main scheme – for example, if one is transferred to a new employer’s scheme, they will require both to be transferred.The only time AVCs can be treated differently is at retirement, when they can be used to invest in Approved Retirement Funds


http://www.pensionsombudsman.ie/cms/sites/default/files/understanding.pdf
 

MrEarl

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Thank you, very much.

(Not the answer I was hoping for, but the answer nonetheless :))
 

agencydude

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Hi Guys,
I have a pension broker hounding me to transfer my paid up pension from a previous company I worked in to a retirement bond. I think their main motivation is that they'll get about €3k commission for doing this.
I was thinking though that I could probably transfer it to my existing company pension as other work colleagues have done something similar where I work.
The question I have though is about the pension levy. Is the pension levy applied to paid up pension funds as well as active pension funds? Or it it just applied to active pension funds?
If its just for active pension funds then it does not seem a good option increasing your active pension pot only to have it taxed by the pension levy
 

dub_nerd

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Interesting. I have two different brokers hounding me for the same thing. From past experience I wouldn't trust a pension sales person as far as I could kick them. Is there a list of different types of charges I can ask them about? I'm not sure I'd trust them to just "give me a list of all charges" because I'm sure there'd be some weasly distinction between commissions, fees, and charges (initial, ongoing and exit).
 

Clohass

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Excellent concise post with some valuable information.

Re the 'Early Retirement' option below on a Defined Benefit Scheme with a normal retirement age of 65. Is there a standard or average percentage of the amount available at normal retirement age that you would receive at age 50,51,52 etc. I have seen this table for Cost Neutral Early retirement for Public Servants but don't know if an indicitive figure or table is available for DB Private Sector Schemes.

Thanks for any/all info

Early retirement
If you're over 50, you can take early retirement now. The term "early retirement" in this context only refers to the pension scheme monies - it doesn't matter if you're still working in another job. Or you may be able to draw the lump sum from the pension scheme now and defer taking the rest of your benefits until later, depending on the rules and type of scheme it was.
 

LDFerguson

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Hi Guys,
I have a pension broker hounding me to transfer my paid up pension from a previous company I worked in to a retirement bond. I think their main motivation is that they'll get about €3k commission for doing this.
I was thinking though that I could probably transfer it to my existing company pension as other work colleagues have done something similar where I work.
A few points that may be relevant here: -

  • If you transfer into your current employer's scheme, there may well be a commission generated for the current scheme's broker. Ask.
  • If you transfer into your current company scheme, you lose the right to choose your own provider and the right to draw the funds from the previous employment at a different time to the current employment. Example - you might decide to draw on the older fund at age 60 to finish out paying your mortgage, but leave all other funds until age 65 when you actually retire.
  • Unless the existing scheme is winding up, you can always leave the funds in it if you're happy where they are, thus not generating any charges for anyone.
  • It is possible to have a self-directed Buy-Out Bond which enables you to buy your own shares, ETFs or property if you want. This would rarely be possible with an employer's scheme unless you are a management employee.
  • Before making any decision on on whether to transfer the funds or not, you need to evaluate the following three options in terms of (a) charges (initial and ongoing) (b) fund and other investment choice and (c) administrative matters - control of fund, who has to sign for decisions etc. - (1) leave the fund where they are in your former employer's scheme, (2) transfer to your new employer's scheme and (3) transfer to a Buy-Out Bond.
  • Having evaluated all three options, if you decide to run with the Buy-Out Bond option and are not happy with the charges being offered by the incumbent broker, tell them. They should be able to lay out the amount of work they're doing for their €3,000 commission. If you don't feel that you're getting value for your €3,000 you can shop around. Virtually any Financial Broker can arrange a Buy-Out Bond.
The question I have though is about the pension levy. Is the pension levy applied to paid up pension funds as well as active pension funds? Or it it just applied to active pension funds?
If its just for active pension funds then it does not seem a good option increasing your active pension pot only to have it taxed by the pension levy
All pre-retirement pension funds in the private sector are subject to the levy. It doesn't matter whether or not contributions are being made to the scheme. So unless you're of age to "retire" this fund now, it will be subject to the 0.6% levy in 2013 and 2014, after which the levy ends.
 

LDFerguson

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Interesting. I have two different brokers hounding me for the same thing. From past experience I wouldn't trust a pension sales person as far as I could kick them. Is there a list of different types of charges I can ask them about? I'm not sure I'd trust them to just "give me a list of all charges" because I'm sure there'd be some weasly distinction between commissions, fees, and charges (initial, ongoing and exit).
  1. Policy fee
  2. Allocation rate
  3. Bid/offer spread
  4. Annual fund charge
  5. Early exit penalties
That would pretty much cover how charges on Buy-Out Bonds are expressed. If 2 is greater than 100% it's a bonus; if it's less than 100% it's a charge.

It's a fair question to ask how much the broker is getting in commission - both as a once-off for setting up the Buy-Out Bond and/or an ongoing basis (renewal or trailer commission). If they're getting an ongoing commission, find out what they propose to do for you on an ongoing basis. Only agree to ongoing trailer commission if you want the ongoing service being offered; it can be turned off otherwise.

Usually, the broker's commission is already accounted for in the charges (1 - 5 above): it's not an additional charge.
 

LDFerguson

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Excellent concise post with some valuable information.

Re the 'Early Retirement' option below on a Defined Benefit Scheme with a normal retirement age of 65. Is there a standard or average percentage of the amount available at normal retirement age that you would receive at age 50,51,52 etc. I have seen this table for Cost Neutral Early retirement for Public Servants but don't know if an indicitive figure or table is available for DB Private Sector Schemes.

Thanks for any/all info
Each scheme has discretion about early retirement. As around 80% of all private sector Defined Benefit schemes are underfunded at present, many schemes will simply refuse to offer early retirement. So the only way to get a definitive answer to your question is to ask the scheme trustees (or consultants) if they are allowing early retirements at all and if so, what your benefits would be.
 

Clohass

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Tks v much Liam for the reply. I'm trying to decide if a bird in the hand is worth possibly 2 in fifteen years time.
 

roytheboyo

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Hi Liam,
Quick question please.
I have a final salary DB pension from previous employment, and my current employer also has final salary DB.
I have the option to transfer but dont want to as previousl employer is solid.
Question is: As previous was final salary it will be based on the salary i had when i left,
i am in my 30s, would it be worth transferring because presumably my final salary in current job will be larger.
Thanks
Roy.
 

LDFerguson

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Hi Liam,
Quick question please.
I have a final salary DB pension from previous employment, and my current employer also has final salary DB.
I have the option to transfer but dont want to as previousl employer is solid.
Question is: As previous was final salary it will be based on the salary i had when i left,
i am in my 30s, would it be worth transferring because presumably my final salary in current job will be larger.
Thanks
Roy.
Hi Roy,

Assuming you're private sector, a transfer from the old DB scheme to the current one would probably not buy you 1 for 1 years. The new scheme would either buy you a reduced number of years for your transfer value or accept the transfer value on a DC basis, so it would just be a separate DC fund held for you.

Cheers,

Liam
 

JackD

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Liam
I have just left a 30 year employment and still hold a DC sum invested in 2 funds. Is there any point in moving this to an ARF or is it simply the same thing? The performance of the fund is ok and as the employer is a large employer, the charges on the existing scheme are only 0.25. Is there any tax reason why I should change? I want to cash the scheme (or ARF if I switch to it) in about 4 to 5 years time.
 

LDFerguson

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Hi JackD,

Sorry - only seeing this post now.

I'm assuming you're over 50. If you choose to transfer your fund to an ARF now, you're "retiring" this fund, so you'd presumably also take your tax-free lump sum from the pension scheme before transferring the balance to an ARF.

The decision to retire a fund or leave it is actually quite an involved one and should take into account your overall financial circumstances, other pensions, eligibility for the State pension, other income and a variety of other factors. So unfortunately it's not a simple Yes or No question.

Some related points which may be of use: -

  • You cannot transfer monies to an ARF before first meeting the minimum income test (guaranteed lifetime income of €12,700 per year from other sources) or else transferring €63,500 to an AMRF. It's planned that these limits will increase to €18,000 per year / €120,000 in March 2016.
  • By leaving the fund in the scheme, it will be subject to the Government pensions levy of 0.6% in 2013 and 2014. The levy doesn't apply to ARFs, although the low annual charge on the scheme goes a long way to compensating you for this.
  • You mention in your post that you would want to "cash the scheme (or ARF if I switch to it) in about 4 to 5 years time." The minimum income test I refer to above will apply then. Any withdrawals after taking your tax-free lump sum entitlement will be taxable as income.
 

JackD

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Many thanks Liam

The bits I don't understand are as follows - (incidentally, I DO meet the minimum income requirement, but I am fairly certain I will stay in the pension fund rather than purchase an ARF for now - the fund charges and levies are harmless enough)

* this business about an assumed withdrawal each year from an ARF and how it is taxed

* whether it is in fact better ACTUALLY to withdraw some each year from the ARF, from a tax efficiency point of view

*the tax treatment of the overall pension sum if I choose, as indicated, to leave it in the fund ie. can I encash the full amount (about 300k) in a few years time or will it be taxed heavily, more heavily than if I opted for an ARF at some pint between now and then?

*finally, am I right in saying that if I leave the pension where it is currently invested, I cannot realise the entire amount simply as a cash lump sum in a few years, rather than purchase some form of pension?

Go raibh mile maith agat.

Jack D (Confused pension holder)
 

LDFerguson

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* this business about an assumed withdrawal each year from an ARF and how it is taxed

* whether it is in fact better ACTUALLY to withdraw some each year from the ARF, from a tax efficiency point of view
Okay - as you meet the guaranteed lifetime minimum income requirement, after you turn 60, you are expected to withdraw a minimum of 5% per year from an ARF as income, which will be taxable. If you choose not to, the ARF Qualifying Fund Manager (QFM) must deduct tax from the ARF on a notional 5% withdrawal.

So if you're going to be hit for the tax one way or another, in a vast majority of cases you'd be mad not to take the income. Otherwise you're very likely to be double-taxed on the same money - once on the "notional" withdrawal and again whenever the money is actually withdrawn.

*the tax treatment of the overall pension sum if I choose, as indicated, to leave it in the fund ie. can I encash the full amount (about 300k) in a few years time or will it be taxed heavily, more heavily than if I opted for an ARF at some pint between now and then?

*finally, am I right in saying that if I leave the pension where it is currently invested, I cannot realise the entire amount simply as a cash lump sum in a few years, rather than purchase some form of pension?
Assuming you meet the guaranteed minimum lifetime income requirement of the time AND the pension scheme allows you access to the ARF options, then you can choose to withdraw the entire fund at retirement in one lump sum.

If you are going down that road, you'd withdraw 25% of the fund as a tax-free lump sum. The balance would be taxable. So if you have €300,000, you'd take €75,000 tax-free and the other €225,000 would be taxable as income. So you'd get hit hard for tax because it would be the equivalent of your earning an income of €225,000 in the one year. It would usually be better from a tax perspective to transfer to an ARF and spread the withdrawal out over a period of years to avail of your tax credits each year.

Related note - I highlighted above two words in the phrase the guaranteed lifetime minimum income. To qualify, the income must be guaranteed to be payable for your lifetime. In practice, this usually just means pensions from other sources. Investment or rental income, for example, does not qualify as it's not guaranteed.
 
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