LDFerguson Frequent Poster
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.
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.