As specialist recruitment consultants in the agricultural industry with many years of experience, we’re often asked for advice on matters that affect a job move (see previous blogs on employment contracts and company cars); without doubt, an important consideration, when leaving one employer and taking up a new post, is your pension provision.
Deciding what to do with your existing workplace pension when changing jobs is the overall task -do you leave it where it is and carry on paying? or do you transfer it to your new employer or your own choice of pension provider? – and, as with most elements of a job move, there are several things to consider:
- Firstly, before signing on the dotted line of a new employment contract, ensure that you understand the remuneration package on offer – including pension provision. You should consider a pension as deferred pay – it therefore forms part of your package; if your new employer does not offer a pension scheme*, this should be factored in to your negotiations.
- Before making your decision, you should also study your current pension provision. It may be that you’ve changed jobs previously and have pension pots with different providers – now would be a good time to take stock of any/all previous pensions that you’ve paid in to. You’ll need to know whether your pensions are:
– Defined benefit pension schemes (also known as ‘final salary’ pensions schemes) or
– Defined contribution pension schemes (also known as ‘money purchase’ pension schemes)
Defined benefit pension schemes (DB)
With this type of pension you are guaranteed a certain return each year when you retire. The amount you receive depends on your salary and the length of time that you’ve worked
for your employer.
Defined contribution pension schemes (DC)
Monies paid in to this type of scheme are invested by the pension provider. The amount you receive depends on how long you’ve been paying in, how much has been paid in, and
how well the investment has done.
- With any financial decision we would always recommend obtaining advice from an Independent Financial Advisor; however below are a few things to consider when deciding to take your pension and reinvest, or to leave it where it is:
– Generally, with each pension type, you make a contribution, your employer makes a contribution and tax relief is then granted by the Government – a pension is therefore beneficial in terms of your tax obligations.
– When leaving an employer and deciding to keep your pension where it is, you may lose certain benefits that are for current employees only – you will need to check this with the scheme’s administrator.
– When deciding to move a pension, the first thing to do is to talk to both parties’ administrators to find out about any penalties, fees or rewards for transferring.
– With a DB pension scheme, your existing provider may offer you a final incentive to transfer out of their scheme. One incentive is an enhancement to the ‘cash equivalent transfer value – CETV’ (your administrator has an obligation to provide you with a Statement of Entitlement within three months of you asking for a transfer value). The enhancement means an increase to your CETV which you then transfer as a whole to another scheme. Alternatively they may offer you a cash payment on top of your CETV – be wary of this as you may have to pay income tax and National Insurance on this and you’ll get a lower pension when you do come to transfer. One thing to note, according to the Pensions Advisory Service, “if your employer offers you a transfer incentive, they are expected to follow a code of conduct … A key element … is that your employer should offer you access to independent financial advice, paid for by your employer to help you decide whether to transfer your pension benefits to a new scheme.”
– Although defined benefit pension schemes offer valuable guarantees, it is possible that the benefits available in the event of death in certain circumstances could be much less attractive. One particular area of concern is where an individual has no dependants (as defined by HMRC) – for example if they have divorced and have non-dependant ‘children’ over the age of 23. In this case there would be no widows pension payable in the event of death and no return of fund (for there is no ‘fund’ to pay out under this type of scheme). Clearly if the pension benefits are substantial this can mean a considerable loss to the members estate. Therefore, whilst transferring to a defined contribution scheme would mean giving up valuable guarantees it would provide far greater control over what might happen in the event of death and potentially access to substantial funds for your family
– With a DC pensions scheme you accumulate an individual pension pot that you can simply invest elsewhere. However, you should still be aware of several factors that may affect your decision:
– Check the GAR (guaranteed annuity rate) on any existing pensions to ensure that they are comparable or that you’re not giving up a rate of 15% or higher for a much lower rate
– Some schemes charge an exit penalty.
– If you have several pension pots from previous employers, it’s worth considering a self invested personal pension (SIPP) – it may help as charges will only be levied on one pot. SIPPs are worth considering as you choose your own investments and they can usually be managed online.
– You also have the option of deciding upon a stakeholder pensions (SHP) – these may be offered by employers or you may take this type of pension independently. SHPs have minimum standards set by the Government: limited charges; low minimum contributions; flexible contributions; penalty-free transfers, and a default investment fund for those who don’t wish to choose their own.
– According to Which? “if you belong to a final salary pension scheme, it’s usually best to leave your money there rather than transferring to your new employer’s defined contribution scheme. This is because final salary pensions give you a guaranteed income when you come to retire. Your final salary pension pot is not linked to how the pension scheme’s underlying investments perform.”
– Under the April 2015 pension freedoms, you will be able to transfer from a private defined benefit scheme to a defined contribution pension; however you could lose valuable benefits and, as with all financial matters, you should seek appropriate independent advice first.
– A final word of warning: If you have built up substantial pension benefits you could be affected by the pension Lifetime Allowance (LTA) that has been around for several years now. For those of you who have been affected and have sought ‘Protection’ against the effect of this you will know that it is imperative that you do not make any further pension contributions otherwise this protection will be lost. However, you may not be aware that simply joining a Death in Service scheme could invalidate your ‘Protection’ and therefore you must make your new employer aware of this fact to ensure you are not disadvantaged in this way.
One thing to remember is that you don’t need to make any knee-jerk decisions – if you stop making contributions or opt out of any pension scheme, the benefits you’ve built up still belong to you.
Also, according to the Pensions Advisory Service, you can “generally transfer at any time up to a year before the date that you are expected to start drawing retirement benefits. In some cases, it’s also possible to transfer to a new pension provider after you have started to draw retirement benefits.”
So, in summary – here’s our advice on the steps to take when deciding to take or leave your pension:
- Thoroughly study the pension offer from your new employer.
- Review your existing pension(s) types.
- Ask previous/current provider and new provider about penalties/fees/rewards for transferring/
joining each scheme.
- Once you have the above information, review all of the above information to ensure that you’re ‘clued up’ and then get independent financial advice before deciding whether to stay or move.
* As of 1st April 2012 all employers are obliged, by law, to auto-enroll employees into a workplace pension scheme if they are aged between 22 and state pension age, and if they work in the UK earning more than £10,000/year. This obligation has been staged so that some small employers, and those with other specific criteria, have until 2018 to auto-enroll their employee.