Wookovski asks: “I’m changing jobs next month. I currently have a pension with my old company. What happens to it when I change jobs. Does the money get transferred in to the new scheme or does it stay dormant in the old scheme until I retire?”
Question 19 – What Happens To My Pension When I Change Jobs? – Shownotes
Today’s question comes from Wookovski:
Hi, I’m changing jobs to a new company next month. I currently have a pension with my old company. My question is what happens to it when I change jobs.
Does the money get transferred in to the new scheme (that I will need to set up at the new company) or does it stay dormant in the old scheme until I retire?
Good question Wookovski and something that people often don’t think about when they leave an employer.
The answer will depend slightly on the type of pension scheme that you had with your old employer.
Defined Contribution Pension Schemes
The most common these days is a defined contribution pension scheme, where you place a defined percentage of your salary into your pension each month (and a certain amount is often matched by your employer). For these schemes, the scheme will remain open and will continue to be invested as it currently was. You can just leave this to grow over time.
However, another alternative is that you can transfer this amount to your new scheme. This will make it much easier to manage going forward (as all your money is in the same place).
A big positive of moving your pension into the new scheme is that most employees tend to have 10-15 employers over their working lives. Therefore, managing the investments in all of these different pension pots can quickly become tiresome.
However, before you do this, there are some things that you should think about:
- What can you invest in? Different schemes will have different limitations on what you can invest in. Therefore, if your new scheme only allows high fee investments in managed mutual funds, then you may be better off leaving your money in your old scheme.
- How much will it cost to transfer? This usually won’t be a deciding factor, but it’s good to know that you’ll often have to pay a fee (either a % or a one-off amount) to transfer your pension funds.
- Does the old scheme charge more when you don’t contribute regularly? Some schemes charge laziness, and actually charge higher fees for individuals who leave their accounts dormant (i.e. do not make new contributions). If this is the case, you probably want to switch.
To make the switch, you usually just need to send your details off to your new pension provider, and they can make the switch automatically. However, this varies for all schemes, so it’s best to call your previous provider first to work out the most efficient (and cost effective) way to make the transfer to your new scheme.
Alternatively, you may wish to set up a Self-Invested Personal Pension and transfer the money into there. However, that comes with its own costs in fees and charges which you’ll need to compare to your new employer scheme. Please see the following for more detail:
Defined Benefit Pension Schemes
The other type of pension scheme is the defined benefit scheme (commonly known as a final salary scheme) where workers are paid a percentage of their final salary depending on their length of service.
Whether you should transfer this is a much harder question and one that you should probably take independent financial advice on.
Either, you can keep it as it is so that when you retire, you old employer will still be liable to paying you this. If you do this, you should document all of your details of the scheme (the value when you leave, T&Cs, etc) so that you can make sure you get what you are entitled to when you retire.
However, under the April 2015 pension freedoms, it actually is possible to transfer from a defined benefit scheme (final salary) to a defined contribution scheme, and then transfer this to your new employer. The idea is that you would be given the “cash equivalent transfer value” which is usually equivalent to the present value of the future payments that you would be entitled to.
Sometimes, employers (especially those worried about their future obligations) may offer you an incentive to take the cash equivalent transfer to reduce their expenses of managing this in the future.
This may be even more appealing as if your company went bust, you may not be guaranteed that final salary pension scheme that you were expecting.
Defined Benefit Pension Schemes
Therefore, in conclusion, after checking exit fees, charges and investment options in the old and new pensions, most people are better off transferring their defined contribution schemes to their new employer.
However, there are many even more complex factors to determine whether you personally should exchange your defined benefit to a defined contribution and then transfer that to your new employer, and you should probably seek financial advice on that.
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