I received an email from a reader a couple of weeks ago, advising he had a pension with a previous employer and wasn’t quite sure what to do with it. Should he leave it where it was or he transfer it to his new employer’s scheme?
He actually has four options here which are:
Leave it in his previous employer’s scheme if the scheme is going to remain in place
Transfer it to a new occupational pension scheme should he join a new company and is invited to participate in their scheme
Transfer what he has accumulated to a personal retirement bond (PRB) sometimes called a buy-out bond (BOB) which is basically a pension scheme in his own name
Take a transfer in lieu of his preserved benefit to a PRSA (he would only choose this option if his new employer didn’t have a pension scheme and he wanted to set up one himself where he wanted to add each month to what he had already accumulated)
There is no right or wrong decision when choosing which option is best, it really comes down to what is best suited to him and what he is most comfortable with.
I personally like the option of transferring his fund into a PRB because he has much more control, more flexibility and more choice over what and where his money is invested.
He is not limited to the choice of funds or providers an employer’s scheme makes available to him. And there might be nothing wrong with them but his choice and options are less than what a PRB can offer.
For example, I completed a review for a client recently in a similar position and based on her age, income, risk profile, income requirement in retirement etc. the fund most suitable for her was with Friends First. But her new and ex-employer’s schemes only had two funds in each which were aligned to her risk profile and none were with Friends First.
Does this matter? Will there be any difference if he leaves it where it is or transfers it to a PRB or to a new employer’s scheme?
The answer is yes of course it makes a difference. A number of different factors will influence what your fund will be worth when you reach retirement age and how much it will pay you each year. The investment performance of your fund is a key factor.
My fear with anyone is if their fund is invested incorrectly and too much is invested in the wrong asset class and doesn’t perform according to plan, they won’t have the time to make up for any loss made. Regardless of what age they are, any slight change can make a significant impact on the value of their fund and what they can expect to receive in retirement.
When I ask people why they select a particular pension fund to invest in each month, the majority tell me there is no exact science.
Most go into funds based on either their age (the younger they are the riskier the fund), what a colleague has chosen, or just picking the pension schemes default option.
This might be the right decision for some but for others it isn’t and really is just down to luck. And if they aren’t lucky, they find out at a later date, much to their dismay, that they were in the wrong fund all of the time.
The lesson learned is that you have to be very careful with (a) what you do with your fund after leaving an employer and (b) what fund they should invest in.
In my opinion your pension fund should represent almost the same individuality of your own fingerprint. It should epitomise your ultimate end goal which is a secure retirement.
Therefor it is important to get good advice to ensure you receive the information and insights which will help you make decisions you will be confident about, and something you will understand and be comfortable with.
The importance of getting the structure of your fund no matter where it is invested or with whom, cannot be underestimated.
There are typically seven different asset allocation models to help ensure people are invested in the proper allocation amongst the different asset classes, and they are:
Cash strategy; Preservation Conservative Investor; Cautious growth; Income; Moderate growthModerate Investor; Long-term growth; EquityGrowth Investor
A conservative investor is typically concerned about short-term market ups and downs. They prefer to minimise risk and maintain their principal. They seek stability and do not prefer fluctuations in investment values.
A moderate investor is willing to sacrifice safety of their principal for potentially higher returns. They can tolerate modest market fluctuations. They are concerned with safety but they want to stay ahead of inflation.
A growth investor is someone who seeks to maximise investment returns. They can tolerate market fluctuations, are willing to accept greater risks in exchange for the prospect of greater rewards.
Time and your tolerance for risk will help you decide whether the fund you are invested in with an ex-employer is right or not.
If it is, there is probably no need to move it because the annual management charges are likely to be quite low because you are part of a group scheme. If no fund in a new or old employer’s scheme is suitable, then a PRB is your best course of action.
Liam Croke is MD of Harmonics Financial Ltd,
based in Plassey. He can be contacted at firstname.lastname@example.org or www.harmonics.ie