Consolidating your pensions from old employments is becoming more common. People in Ireland increasingly have pensions from a lot of different jobs held during their career. So what exactly does consolidating your pension involve?
We caught up on a conversation between Olive Ryan, head of client service at online financial advisor Moneycube.ie, and Alan Dineen, account manager at Zurich Life.
This article is an edited extract of a webinar on consolidating your pension held as part of PAW21.
Olive Ryan, Moneycube: Alan, welcome to Pensions Awareness Week. Tell us a little about consolidating your pension.
Alan Dineen, Zurich Life: We can break it down into two categories, the newer workforce and Ireland today versus, say, 30-40 years ago. The traditional approach was, when you finish school or college, you might go into steady employment. You will probably work there from your 20s and 30s, all the way up to retirement, plan your pension and off you go.
The more recent workforce in Ireland, with a lot of tech companies moving in for example, has created an awful lot more opportunities for people. And what is happening is they might build up a pension and a career with a company for three to five years, and they might move on to a competitor, they might start their own business, or they might just even move completely different industries.
So what has happened then is that we’re getting to retirement and finding that people often don’t really have a plan in terms of where they are at or how much they have built up. They have all these pots of money dotted around the place with different investment companies, different financial advisors and different companies.
It becomes hard for them to plan their retirements. People need to know where they are all the way along to the financial journey. Consolidation of those pensions really does give a good handle on where you are, where you’re going and what you need to do to get what you want from retirement.
OR: Yeah, exactly. So it could get very tricky, as you say, when you get to retirement age to know really what you have, and what your entitlements are and if you don’t combine them.
AD: Yeah, two points that jumped out at me would be managing the investment side of your pension and the timing of when you access your pensions.
With defined contribution pensions, as you pay your money in over time, you get to pick specific funds from a low to medium to high-risk scale. But in terms of the investment choice, you may not have a wide investment choice with the current employer that you are with. For example, if I worked for a company for four or five years, and there’s a couple of hundred of my colleagues in the scheme, the investment choice in that scheme might be very restricted. You might have low/ medium/ high risk funds, but not a wide access to maybe property funds or technology funds and stuff like that.
By consolidating your you’re now in a new pension scheme and have a different investment options. So investment choice really, and flexibility around investment choice is one of the main reasons.
The second reason is around the timing of when you’re accessing your pensions. If you move your old pension into something outside of your new employer, where you would go to, you will give yourself some options of maybe being able to access that from age 50. It’s separate from any pension in your current job, and can be accessed separately.
That gives you more flexibility around financial life events where you might say, look, I have a bit of a pension pot that was built from a company ten years ago, I can actually access that now without accessing my main pension scheme or without accessing the bulk of my pension scheme. People have done that for a variety of reasons: kids going to college, medical emergencies, getting worked done on the house. There’s a variety of reasons, but the options around when you time your pension drawdown are very valuable.
On the other hand, if you bring your pensions from an old employer into your new employer all along, you really are compounding that restriction of not being able to time when you draw down part of your pension fund
OR: Absolutely. And a couple other reasons, I think, could be relevant as well. Firstly there are potential cost differences if you move to your pension. It’s not always the case, but there are times when moving your old pension will give you lower costs. And lower costs will always mean better pension funds, they allow your fund to grow more.
Secondly, financial advice is another factor. That can be important for people if you are leaving an employer, because you can find it becomes very difficult to get information or advice on the pension once you have left the company.
At this point is probably important for us to make the distinction between two different types of pensions that people might have from their employer. One is a defined contribution pension, and one is a defined benefit pension. And they actually can have a big impact on whether you should move your pension or not as well. Alan, isn’t that true?
AD: Yeah, absolutely. Traditionally, you would have seen, employers enrol people into a defined benefit pension scheme. A defined benefit pension scheme is does exactly what it says in the tin: you are promised a defined amount of money on a guaranteed basis for life. I could pay into a defined benefit pension scheme for 10, 20, 30 years, and my employer would be paying into the account, and on retirement, I’ll get, say, €20,000 a year as a pension from the day you retire. And that’s guaranteed up until up until the day you die. So it’s a gold-plated type of pension scheme.
The other type of pension scheme is the newer approach, which would be a Defined Contribution Scheme. Here, you and your employer pay in a defined amount, and you invest it dependent on your risk profile. The amount paid in, and the investment performance, will dictate how much defined contribution you’ve paid in will have grown over time.
For the purpose of discussion, we’re more focused on defined contribution, which are the more portable and the easier ones to sit consider.
To say, I’m going to get out of a defined benefit pension scheme needs a little bit more advice and there really is no one size fits all. It’s not as clearcut.
To develop that point, there are approximately 600 defined benefit pension schemes left in the country. Some of them will be a in better financial position than others at the moment.
OR: How do you come out of a defined benefit pension scheme?
AD: The actuaries run this process. Well, we’ll say look, we promised you €10,000 at retirement in a number of years’ time, but we will calculate that to a sum of money as at today. For example, they will offer you €200,000 euros right now to get out of this scheme. So you might think €200,000 euros, that’s brilliant. But the factors that drive that decision, whether you would take it or not – there’s probably too many to cover in this conversation. I wouldn’t take the decision lightly. And I definitely wouldn’t take the decision without having you know, a good 360-degree view from a financial advisor perspective.
OR: Yeah, absolutely. And of course, if you do move your defined benefit pension, it isn’t a cash-in-your-hand situation. It is a transfer of value that you can move to another pension arrangement before you until you retire.
AD: Historically, defined benefit schemes would invest in quite a conservative approach and like deposit type structures like cash or bonds, rather than the ups and downs of the investment market. But they were getting quite substantial and healthy return maybe 2, 3, 4 percent interest rate returns on that every year which made it easy for them to guarantee decent pensions for individuals that retirement. We’re now in a in an environment which is kind of unchartered territory for investment managers, scheme trustees and action phase where interest rates are very, very low or negative in a lot of times, and they can’t get the same return. They need to keep pace with the pensions being drawn out of the scheme.
That’s a principal reason some of the schemes have been closed down or individuals are getting offered attractive transfer values.
OR: So as we said, this conversation is really focused on the defined contribution. Now that we know why we should move our pensions, and we’ve also discussed whether we can or it’s appropriate enough, depending on the pension type we have, what options are there and how do we actually go about moving?
AD: If you work for a company for three or four years and you hand in your notice you pay your final contribution to the pension scheme. You move to your new employer. Following your departure from the old employer you should receive a document called ‘Leaving Service Options’. A leaving service option will give you three main options.
The first option is to do nothing. The defined contribution value that you have built up over time remains invested in the funds of your choice. And you leave it there until you decide to do something or just wait until you’re 60 or 65, or whatever the company retirement age is.
The second option, now that you’ve left Company A to join Company B, is to take the value of that company pension, bring it across and move it into Company B.
The final option is to take the defined contribution value and move it into a policy called a personal retirement bond, into your own name. So it’s not associated with your new employer, for example, and you would invest that how you see fit. You can’t add to it going forward, but you would just manage the investments through your advisor and try and grow that pot of money between when you took the transfer value to when you’re going to access it in retirement.
OR: So in looking at the two options for moving the pension, what are the advantages for someone to move it to their employer?
AD: You could have an instance where the charges within the new employer scheme are slightly more competitive. You could have more investment options in the new employer teams. And a lot of people want to move to the new employer scheme because they get one annual benefit statements and can keep track that way and it’s easier to manage and stuff like that.
But with the development of online technology these days you can have multiple pension pots in multiple different places and be able to keep track them just as easy as you keep track of your internet banking or your Revolut account. So while it was traditionally seen that it was an advantage to kind of bring them all together in one specific place, that’s less vital today.
But as I said earlier, moving it all into a single pot may restrict some of your flexibility in terms of drawdown options where you might want to stagger your pension drawdown over time. And that’s why the third option would be generally more popular, where you would move it to what’s known as a personal retirement bond in your own name
This gives you a more flexible option of staggered drawdown.
There can be disadvantages to moving an old pension into your new employer’s scheme as well. You could have the inverse of a moment ago where the investment choice in the new scheme is actually more restrictive than the scheme you were previously in, or the charges might be slightly less favourable than the charge that you were in previously. So there’s no one-size-fits-all approach. But keeping it in your own name individually generally gives more options than moving into your new employer.