What happens to your pension when you are made redundant?

Unfortunately, since the death of the Celtic Tiger, a lot of people have been made redundant from their jobs. A lot of these jobs had pension schemes attached to them. What happens to your pension when you are made redundant? There are a number options that are open to you.

Leave your pension where it is

Your pension is set up under trust, which means that it is not an asset of the company and therefore safe from the liquidator and creditors. If you wish, you can just leave the pension where it is and wait until your retire before maturing it.

  • You have no control over the investment funds. This means you can only invest in the funds made available by the trustees. You cannot switch between funds without the trustees signature.
  • You have to keep in contact with the trustees of your pension. If you are a long way from retirement, this may prove difficult as trustees die, companies merge, are bought out or close down.
  • If you are in a defined benefit pension, you need to be aware of the scheme funding levels. Most Irish defined benefit schemes are in deficit and if your company is making people redundant, it is likely your pension scheme is too. The issue of defined benefit schemes is a bit more complex and I wrote a piece on this previously.

Transfer pension to a Buy Out Bond

A Buy Out Bond is a pension designed specifically to receive the retained pension benefits from employer pension schemes. They are also know as Personal Retirement Bonds.

  • You will have complete control over the investment process and can make investment changes yourself.
  • You will have access to the full investment range on offer from the chose insurance company, whereas under most company paid pension schemes, there is a limited fund choice to members.
  • You are bound by the same rules as the company pension scheme, so things like the retirement age will remain the same. You also have the option of drawing down your pension benefits from age 50 if you want.
  • If you were in a defined benefit scheme, you will now be assuming all the investment risk and it is unlikely you will receive the same benefits at retirement as a fully funded defined benefit scheme. Again, read my previous piece on this before making a decision.
  • If you transfer to a buy out bond, you can always transfer the benefits to a new employer pension scheme in the future.
  • When you mature the bond, you can either take up to 150% final salary as a tax-free lump sum (dependent on years service) and purchase an annuity with the remainder or take 25% of the fund value tax-free and invest the remainder in an ARF.

Transfer pension to a PRSA

A PRSA is a different type of pension that was set up by the government. It is similar to a Buy Out Bond  in that you can have a great fund choice. If transferring from a company pension plan, there are some stipulations before you can transfer.

  • You must have been in the scheme for 15 years or less; or
  • The scheme is being wound up or you are changing employment.
  • If the fund is worth more than €10,000, a Certificate of Comparison is required. This document compares the benefits that would be received if you stayed in the scheme and the benefits if you move to a PRSA. The cost of having this completed varies.
  • At retirement under the PRSA, you take 25% of the fund value tax-free and you can either purchase and annuity or invest in an ARF with the remainder.

Transfer pension to a new employer scheme

If you get new employment and there is a company pension plan in place, you may transfer your benefits to the new scheme.

  • You keep your benefits in once place.
  • Under company schemes, you have to be a member of the scheme for 2 years to be legally entitled to the value of the employers contributions. If you transfer the retained benefits into the scheme, the service under your previous employer count towards the 2 year requirement under the new pension scheme!

Get new employer to take over as trustee

Your new employer can elect to take over as the trustee of the old pension plan and start contributing to the plan. This really only applies to one man executive pension plans. It is especially useful if you start up your own business and your company can act as the trustee.