One Pot or Not? Think Before You Merge Your Pensions.
A common question we get from clients is whether they should combine pensions from previous employment with their current occupational pension. A perfectly valid question as combining your pensions into one scheme for the sake of simplicity, administrative ease and less paperwork can be a solution, but it is not always the correct choice. Irish pension legislation provides compelling reasons to keep your pension benefits separate.
Access Flexibility
If you have pension benefits from previous employments or in a Personal Retirement Bond (PRB), you can access them from age 50. By amalgamating your deferred pensions with your current scheme, you lose the flexibility of drawing them down early as you must either reach normal retirement age or leave your current employment to access the overall pot. If you move them to a Personal Retirement Savings Account (PRSA) you lose access to the benefits until you reach age 60 or fully retire from all employments.
Retirement Planning
Having a few different pension pots affords you the opportunity of a phased retirement. By drawing down your pensions at various times, you can access lump sums as you need them, and the remainder of your pensions stay invested. This can be advantageous as they continue to grow, so does your future tax-free lump sums (TFLS). If you do not require the income from the balance after the TFLS, this avoids paying tax on imputed distributions from Approved Retirement Funds (ARF) or annuity income.
Retiring Outside Ireland
If you would like the flexibility of retiring abroad, leaving your pension in an occupational scheme allows you to transfer your Irish pension abroad. If you transfer you benefit to a PRSA, this will trigger a taxable event if you move your pension abroad in the future.
Loss of Benefits & Guarantees
You may have benefits or guarantees on your existing plan that you may lose if you transfer. If you are a member of a defined contribution occupational pension scheme, you have the option of a salary and service TFLS on draw down. Depending on your final salary and length of service, this can provide a greater lump sum than the 25% lump sum from a PRSA. Your retained pension may also have some guarantees built in that you can avail of at retirement, such as guaranteed annuity rates.
Investment Diversification
By consolidating your pensions into one pot, you could be reducing the overall diversification of your portfolio. Some clients like the idea of having their pensions spread across multiple providers and funds that each provider can offer.
Fees & Charges
If your deferred pension is in an occupational scheme, often the fees and charges are lower than individual contracts such as PRSA & PRB contracts. Another consideration is the cost of transferring an occupational pension to a PRSA if the value is greater than €10,000. The reason for this is a Certificate of Benefit Comparison is required, and this can cost between €1,000 to €3,000 depending on the type of occupational pension.
In conclusion, consolidating your pensions can be a smart move to simplify your financial life- but it is not always the best fit for everyone. From flexibility and investment choice to fees and potential tax implications, there is a lot to weigh up. Before making any decisions, speak with your adviser who can assess your individual circumstances and help you make the most of your retirement savings. A little guidance now could mean a lot more peace of mind later.
About the author
Dale Duignan CFP® is a financial planner in the Unio Wealth Management’s Financial Planning Team and has a wealth of experience in advising high net worth individuals and families on how they can achieve their goals.
At Unio Employee Benefits, we are happy to work with clients to help provide solutions to bridge potential gaps for their scheme members, contact your client manager directly or get in touch at enquiries@unio.ie.