Pension Switching...     

JOB hoppers who switched employers during the boom in search of more money are starting to fret about the pensions they left behind, especially as more businesses fall victim to the recession. Pension schemes are ring-fenced when firms go bust. However, former employees may prefer to move their pensions out of schemes that are shackled to businesses that have failed or are on the brink. We examine their options.

CAN I GET MY MONEY BACK?

Yes, if you have been in the scheme for less than two years. This option has tax advantages because you only pay 20% tax on the refunds, even if you received 41% tax relief on the contributions.

For example: A refund of €2,000 would leave you with €1,600 after tax. If you top this up with savings of €1,111, you could afford to invest €2,711 in a new pension scheme. This would bring tax relief of €1,111 if you are a top – rate taxpayer, so that the net cost of the top-up is nil.

HOW SOON CAN I ACCESS THE PENSION?

When you reach 50, provided the trustees of your former employer’s pension scheme agree. However, your pension won’t be worth much if you retire at 50, so it’s only an option if you’re desperate for the money.

SHOULD I TRANSFER TO MY CURRENT SCHEME?

Not necessarily. Transferring benefits from an old employer to your current scheme allows you to keep all of your pensions under one roof. Convenience may carry a cost. Just because you can transfer benefits between employers’ schemes doesn’t mean that you should. Your former employers’ scheme may offer a better choice of investments or a guaranteed growth rate. There may also be charges for leaving one scheme and joining another.
Retaining memberships of several schemes allows you to stagger retirement, drawing a pension from one scheme so that you could afford to reduce your working week in your current job as a prelude to retirement.

CAN I GO IT ALONE?

Rather than switching from one employer’s scheme to another, you can take control of your pension from an old job by transferring it to a buy-out bond. The money stays locked up until retirement, but you get to decide where and how it is invested. All pension providers offer buy-out bonds, with some having self-directed versions that allow you pick individual assets.
Personal retirement savings accounts (PRSAs) offer a similar freedom, although you face hurdles transferring from occupational pension schemes to PRSAs, such as:

• Transfers are not allowed if you have been in the occupational scheme for more than 15years.
• If the transfer amount is greater than €10,000, an actuary must provide you with a certificate of benefits comparison, which costs at least €500.

PRSAs used to provide back-door access to approved retirement funds (ARFs) for those in occupational schemes, allowing them keep control of their pensions in retirement. This advantage has disappeared since the Finance Act 2011 opened access to ARFs to all pension savers.

TOP TIP

The starting point in deciding upon your options is to obtain an up – to – date valuation of all your pension funds.

The Future for Pensions

Pensions and Retirement Planning are currently going through a Revolutionary change. It has never been more important to review your retirement planning. More important than having a planned retirement income is the importance of ensuring its adequacy. This is even more critical given the recent proposed legislative changes to private and State Pension.

• Reduction in tax reliefs. 41%-33%. This could be the last year to claim relief at 41%. For those who currently qualify for 20%, tax relief will rise to 33%
• 20% tax will apply to Tax Free Cash in excess of €200,000. While it was originally anticipated to apply from 2014, it now appears that this may apply from the budget next December.
• In addition, the extension of ARF/AMRF flexibility to all Defined Contribution arrangements is seen as very welcome. However, it is anticipated that the minimum income requirement will increase by 50%. This means that the qualifying rules will be more onerous
• The State Pension age will be increased gradually to 68 years. Beginning in 2014, from 65-66, increasing to 67 in 2021 and to 68 in 2028. If you pension income is state pension integrated, this will affect you? Your retirement income will be €11,995 less per annum for up to three years (until age 68)
• Many services are under the spotlight in an attempt to improve our national budgeting position. We cannot rule out further change (cutbacks) in the future

The aim of the National Pensions Framework is to deliver security, equity, choice and clarity for the individual. It also aims to increase pension coverage, particularly among low to middle income groups and to ensure that State support for pensions is equitable and sustainable. The framework sets out key developments for the future of pension provision in Ireland, as follows:

With all the focus on Europe, I thought it would be useful to highlight the views of BlackRock’s Bob Doll, Chief Equity Strategist for Fundamental Equities. Not only are BlackRock the world’s largest fund manager by assets, they are also based in New York and offer us a view with a broader global context.

The worst of the correction is behind us

“Given the magnitude of the recent currency and sovereign debt concerns, equity market performance is likely to be driven by the broad macro outlook rather than company-specific fundamentals. This is usually the sort of environment where volatility remains high in both directions. It is important to remember that corrections during times of economic recovery are normal, but are often intense and quick. Regarding the current correction, we believe the worst should be behind us in terms of the magnitude of the downturn, but it will likely take some additional time before markets can repair themselves. Looking ahead, one positive factor is that market valuations have become more attractive in recent weeks, as prices have dropped while earnings have increased. Over time, we expect that additional clarity around the situation in Europe and financial market reform in the US should provide a measure of stability; and a sense that the economic recovery remains on track should help spark a turnaround in the recent aversion to higher-risk assets”

There are a great number of individuals who have remained on as members of their former employers’ pension schemes long after they have left their employments. And, the trustees of these pension schemes continue to bear the responsibilities of trustees for these “former employees” pension benefits.

In many cases the employer company acts as trustee, meaning that the individual directors of the company are in effect the trustees. This could mean that, if you are a recently appointed director, you may be acting as a trustee for the pensions of individuals who left your company’s employment long before you had anything to do with the company.