FDC: What happens to my pension benefits if I change my job?

BY TOM BARRY

THE changing work environment means people nowadays leave employment and move companies more frequently, and a question I get asked continually is ‘What should I do with my pension benefits?’ 

It is a very important decision you need to consider. This can be especially so if your employer has been diligently contributing to your pension scheme for many years and you will need to consider your pension plan options depending on your own circumstances as one option may be more beneficial to you than another.

Your main options are:

1: Leave your pension benefits where they are, this is the easiest choice with the least amount of hassle, this is also known as a ‘deferred benefit’. The pension scheme is obliged to maintain your benefits when you are no longer an employee but there is no obligation to continue engaging with you on the status of your pension. 

A related potential issue is the actual fund performance: it never ceases to amaze me the poor fund performance that many large pensions scheme members must put up with. 

This is because as a scheme member you are restricted to investing only in the funds that the scheme has chosen and all too often, they haven’t delivered the same returns as a comparable fund index.

2: Transfer your pension is another option to consider as you can potentially transfer your pension to a Personal Retirement Bond also known as a Buyout Bond, Personal Retirement Savings Account (PRSA), or to the new occupational scheme of your new employment.

If you take your benefits to your new employer, it is a way of keeping control of your pension for administration purposes. 

However, caution is needed here as not all schemes allow the transfer, and changing jobs again in the future will force you to make this decision all over again and it would be the trustees who decide what funds are available to invest in.

The Buyout Bond (BOB) allows you to put the pension benefits in your name and under your control, which will open options to you as to how your funds are invested but no further contributions can be paid into the BOB. 

It is essentially a ring-fenced pension account for future draw-down.

PRSAs have several benefits in addition to taking control of your pension, you can make additional contributions to a PRSA, and if you had a relatively large scheme value you could split it between a number of PRSAs and in doing so you can access each one independently as you need it, this method can be very tax efficient when you start to drawdown your retirement benefits.

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, fund performance, and flexibility the current scheme offers, versus a potential new scheme.

3: Get a refund of your contributions.

This only applies if you have less than two years’ service, but you only get back what you put in, not your employer’s contributions and it is also subject to tax at the standard rate (20%) seeing as you would have received tax relief on what you put in first day.

As you can see, leaving employment and what to do with your pension benefits isn’t a straightforward choice and the most convenient choice isn’t necessarily the best choice. 

Many people will choose to do nothing and will leave things as they were and sometimes this will work out perfectly. 

Other times it can be a costly mistake, so it is helpful to have advice and to conduct a thorough analysis of the pros and cons of any decision. Your future might thank you for it.

• Tom Barry, QFA, RPA, is a financial consultant with FDC Skibbereen. FDC Financial Services is regulated by the Central Bank of Ireland.