Charges
If you are part of a large occupational pension scheme, there is a good chance that your ex-employer is paying some of the cost of managing your pension and therefore the cost to you is very low. And they will continue to pay the fees going forward even though you no longer work for them. If you transfer your pension into a plan in your own name, you will now pay all of the costs yourself, so it may be more expensive.
Access to your benefits before age 60
If you have retained pension benefits from past employment, either still in the scheme or in a buy out bond, you can access them from age 50 onwards. It doesn’t matter if you are still working. If you have consolidated them into your existing work pension, you cannot draw them down early. You have to leave your current employment to access your pension.
If you moved them to a PRSA, you have to actually retire to access your pensions before age 60.
People tend to make this out to be more important than it actually is. People like the idea of accessing their pension early but in reality, not many actually do.
Draw down flexibility
Something that is becoming more popular now is the gradual drawdown of pensions. Having a number of different pension pots, you can mature them at different times, taking a smaller lump sum payment and taking income from the remainder. The remainder of your pensions stays invested with no imputed distribution requirement and hopefully a larger tax free lump sum in the future.
If you consolidated everything into one occupational pension scheme, you have to mature your pension at one time. If you transfer your pension to a PRSA, you have the option of splitting the PRSA into multiple policies and maturing them at different times.
Retiring abroad
If you do not intend to retire in Ireland, it is very important that you get this right. Leaving your pension in an occupational pension scheme gives you the ability to transfer your pension abroad. If you consolidate your pensions into a PRSA, transferring your pension abroad in the future will create a taxable event. You will have to transfer the benefits to a master trust arrangement before you transfer the benefits abroad.
Early vesting
I love this little trick. Under occupational pension schemes, you have to be a member of the scheme for 2 years to be legally entitled to the value of your employer’s contributions (with employer paid PRSAs you are entitled to their contributions from day 1). If you transfer in the value of an old occupational pension scheme, not only does the money transfer in but the years service transfers also. If you had more than 2 years service in the old scheme, you will get immediate vesting rights in the new scheme. This is very handy if your current job isn’t really working out and you can see yourself moving on.
Getting back your tax free lump sum
Lots of people get made redundant through their working life. One of the options in calculating the tax free redundancy package is to forgo your future pension lump sum in exchange for a larger tax free pay out now.
At present, you can get your tax free lump sum back if you transfer your benefits to a PRSA. Even with having to pay for a comparison of benefits certificate and potentially higher ongoing costs, the benefits can far outweigh the costs. This loophole may be closed at any time.
These are just some of the factors you need to take into consideration before you decide on consolidating your pension.
- By Steven Barrett of Bluewater Financial Planning.
