Planning for retirement is a crucial aspect of financial stability, and joining a pension scheme early is a prudent step toward securing your future. However, in today’s dynamic job market, the question of what happens to your pension when you leave your job is becoming increasingly common. In this article, we’ll explore the key considerations and options you face when leaving your job while being a member of an occupational pension scheme. It’s important to approach these decisions with care, seeking professional advice to make well-informed choices.
Understanding Your Pension Rights
Upon leaving employment, you are entitled to a statement outlining your Leaving Service Benefit Options. This statement, provided by pension scheme administrators/advisors, will categorize your entitlements and options based on your period of scheme membership.
When you leave your job and your employer’s pension scheme, you should receive what is known as a ‘Leaving Service Options letter’, or your ‘Pension Benefits Options Statement’. This document will include important information such as the date you joined the scheme, the date you left, the value of your Pension, and finally setting out your choices available to your particular situation upon leaving. It is therefore vital that you receive this document. You typically have several options:
Do Nothing and Leave your Pension where it is: You can leave your pension where it is, within your old company’s pension scheme. This is the easiest option, but it’s essential to consider a few factors. You should check how much control you have over your pension within this scheme, as some may limit your investment choices. In this situations, you are often left in the dark without freedom to make investment decisions. In many cases, employees Pension savings are actually moved out of investments and into cash leaving them unable to outperform inflation and the associated charges within the fund. Additionally, review the performance, charges, and overall quality of the pension. If it’s underperforming or has high fees, it might be wise to explore other options. Lastly, consider whether you’ll have access to advice on your pension, as this could be a significant factor in your decision.
Move Your Pension to Your New Employer: Some pension schemes allow you to transfer your old pension into your new employer’s scheme, however this is not always possible. This option consolidates your pension savings in one place, making it more manageable. However, you should still assess the control, charges, and investment choices available in your new employer’s scheme. Keep in mind that if you change jobs again, you may encounter the same questions about dealing with old pensions.
Moving the scheme into a pension scheme in your own name such as a Personal Retirement Bond:
A Personal Retirement Bond (PRB) offers more control. It allows you to manage your investments and receive guidance from a financial advisor. You can switch providers for better value, although charges may be higher. This option severs ties with your old employer, which means no involvement from trustees. This option involves transferring your pension into a personal retirement bond (or buyout bond in some cases), which is in your name only. Taking control of your pensions from previous jobs offers several advantages. You gain independence from your old employer’s scheme while keeping your pension separate from your new employer. You have more control over investment choices, transparent fee structures, and the flexibility to switch pension providers if desired. It also makes it easier to track and manage pensions from past jobs, even those from years ago. Remember, you can access your pension benefits from age 50, but the age at which you start drawing your pension can affect the amount you receive. Early retirement might be possible, but it depends on the rules of your specific scheme.
Refund of employee contributions: If you have less than two years service, you can request a refund of the value of your own employee contributions less tax (currently 20%). Typically you are not entitled to a refund of the employer contributions made by the employer.
When deciding what to do with your pension when changing jobs, consider the pros and cons of each option:
Pros of Doing Nothing:
Simplicity and ease.
No immediate decision required.
Cons of Doing Nothing:
Limited control over your pension.
Potential for poor investment choices.
Lack of transparency on charges.
May not receive advice on your pension.
Pros of Moving Your Pension to Your New Employer:
Consolidation of pension savings.
Easier to manage in one place.
Continued employer contributions if applicable.
Cons of Moving Your Pension to Your New Employer:
Limited investment control.
Potential for high charges.
Tied to your current employer, which may not be ideal in the long term.
Pros of Moving into a Personal Retirement Bond:
Access from age 50
Full control over investment choices.
Transparent fee structures.
Independence from current and former employers.
Easier tracking of multiple pensions.
Cons of Moving into a Personal Retirement Bond:
Requires more active management this is where the importance of a financial advisor comes in
Regarding the ease of transferring a pension, it typically involves some paperwork and coordination between pension providers. It is relatively straightforward & can be completed through a financial advisor & it’s essential to follow the correct procedures to avoid any issues.
If your current or former employer offers an enhanced transfer value from a defined benefit scheme (which guarantees a retirement income), you should carefully evaluate the offer. Enhanced transfer values can be attractive, but they often come with trade-offs. Consider factors such as the financial health of the scheme, your individual circumstances, your risk tolerance, and your long-term retirement goals. It’s advisable to consult with a financial advisor or pension specialist to make an informed decision in such cases. Lastly, keep in mind that pension regulations and options can vary by country, so it’s essential to understand the specific rules and options applicable to your situation and jurisdiction. Book a consultation with an Alpha Wealth financial advisor, we can help you make the best decision based on your unique circumstances.