You may recently have changed employers, lost your job or decided to set up on your own. Changing jobs a few times during your career is not uncommon. In a recent survey by Microsoft 41% of employees said they were considering a career change as a direct result of the pandemic.
Changing jobs is stressful and thinking about your pension is the last thing you want to do. Often your pension just gets left behind. Why? It’s just easier! Employees often have multiple jobs over the course of their career and this can lead to multiple pensions with different options. Confusing – most certainly yes!
Leaving your pension invested with your previous employer is not always the best thing to do. When you leave employment, you should seek financial advice on the various options offered to you i.e. move to your new employer’s pension scheme, move to a Personal Retirement Bond, move to a PRSA, or leave invested with your old employer. Its understandable that pensions remain with an old employer – it is hard to deal with this on your own.
You should know whether your pension(s) are Defined Benefit or Defined Contribution as this will help you understand the options that are offered as a result.
Defined Benefit pension vs. Defined Contribution
A Defined Benefit and a Defined Contribution are both types of Company Pension Schemes. A defined benefit pension plan (DB) sets out the specific benefit that will be paid to you when you retire. This calculation takes into account factors such as the number of years an employee has worked and their salary, which then dictates the pension and/or lump sum that will be paid on retirement.
A defined contribution pension (DC) is an accumulation of funds that makes up a person’s pension pot. A person contributes a portion of their salary to a pension scheme. The employer also contributes (although not always !) and these contributions are invested in a fund in order to provide retirement benefits. There is tax relief on this type of pension and the benefits at retirement will depend on a number of different factors such as the contribution levels, how the investment fund performs, plan charges and fees and the annuity rates available when you retire.
Defined Benefit Pensions | Real Client Example
We recently helped a gentleman (married with adult children) whom reached retirement age and had a Defined Benefit pension.
His former employer, a semi-state company, had offered him an enhanced Transfer Value and he needed help in deciding which option best suited his individual circumstances i.e. remain within the Defined Benefit Scheme or accept the Transfer Value.
It’s an important decision that cannot be taken lightly and all options must be reviewed and considered carefully.
We considered his personal circumstances, the financial health of the Defined Benefit Scheme and the advantages and disadvantages of transferring from a Defined Benefit to a Defined Contribution plan as well as his retirement options. His wife was involved in the process as it is important that both spouses make this decision together. His main concern was passing a lump sum to his estate should he pass away.
There are risks involved with either option. If you remain with the Defined Benefit Scheme, the current financial health of the scheme may improve or diminish over time. Transferring out gives you greater flexibility in terms of when and how you access your benefits, and gives you greater control over the funds your pension invests in and how these are passed onto your estate.
Using Cash Flow planning, we were able to provide a comparison report illustrating the differences between the two scenarios and their various outcomes – known as ‘what if’ scenarios. This enabled him to make an informed decision using both visuals and projected benefits. There are risks involved in staying in the Defined Benefit Scheme – or in taking the transfer value.
Our client opted to accept the Transfer Value as he wanted more control over his pension and wanted greater flexibility in terms of how and when he accessed his pension benefits. We guided him through the transfer process and he was happy to access his tax-free lump sum once the transfer was complete.
He was happy that we clarified his options for him as each individual case is different. He loved the visuals and the summary report that Cash Flow Planning provided and said it gave him clarity of mind.
If you are offered a transfer value from your Defined Benefit Pension, we recommend you seek the advice of a Financial Adviser whom will guide you the process and establish the right course of action for you.
This does not constitute financial advice for you. A full Factfind & Needs Analysis would need to be carried out before recommending the best solution for your own personal circumstances.
Steps you can take
When you retire, there are a lot of decisions that need to be made. You will have to decide what type of lifestyle you wish to fund for, and how much money you’ll need each month.
Pension transfers are complicated and there is an onerous amount of paperwork to be completed. Even if you understand the process well enough, deciding on which option works best for your personal needs can still be confusing.
Sunrise Financial Planning specialise in this area and can review your pensions. We know that everyone’s financial situation is different so we offer flexible solutions, designed to meet individual requirements while taking into account all relevant factors when making recommendations regarding pensions transfer options. We want to make sure that it is in your best interest!
Our goal is to help people make informed choices about their retirement plans by providing expert guidance through every step of the process – from the initial review and planning stage, to executing the details and managing the complete transfer of funds.
Once you’re ready to move any existing old pensions, we’ll provide all the necessary assistance including:
-Reviewing your current pension arrangements
-Identifying options for transferring or cashing in on your pensions
-Securing professional advice where needed
If you have a question regarding your company pensions, old pensions or are looking for pension transfer options, you’ve come to the right place!
Please feel free to send us a direct message on social media or an email to grainne@sunrisefinancialplanning.ie
