Pensions and Redundancy
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Pensions are complex and difficult to understand and difficult to explain. But they really are important, so do try to get your head around them. We have tried to simplify them so that you will take an interest.
But this can be a guide only. You must speak to your company’s pension provider or to an independent actuary or pensions consultant to figure out all your options and which are best for you. Professional advisors charge an hourly rate, so it pays for you to be well informed before you consult them.
I have been employed for less than two years, what happens my pension fund?
In most cases, your employer will refund you the contributions which you have made to the scheme and they will be taxed at 20%. Your employer’s contributions will revert to your employer. You can’t do anything about this as your employer is not obliged under law to give you accrued pension rights until you have two years’ service.
If you have transferred your rights from a previous employer’s pension scheme, then the two years is reduced by the length of membership in that scheme and your employer will have to give you the options set out below.
Some pension schemes have a shorter vesting period than 2 years and you will have the option of retaining the rights or withdrawing your own pension contributions. Generally speaking, you would be better off retaining your rights as you get the benefit of the employer’s contributions.
Some schemes allow people who are being made redundant within 2 years to retain their rights or your employer may make an exception for you. There is no harm in asking for this.
I have a PRSA – what happens?
Nothing. The beauty of the PRSA is that it is in your name. Your employer will stop contributing but the relationship is between you and the pension provider e.g. Irish Life.
When you get a new job or become self employed, you can continue contributing again. If you join a new employer who has a company pension scheme, you may be obliged to join their scheme and you would usually be better off doing so.
I have an defined contribution pension scheme – what happens?
You have two main options.
You may transfer it to a buy-out bond. This would be a fund in your name with a pension provider. This cuts all links with your former employer.
You may leave it where it is for the moment with your employer and transfer it at a later stage. It will continue to grow or decline in line with the underlying investments, but your employer will stop making contributions. The advantage of doing this is that large employer schemes often have much lower charges than buy-out bonds. However, in a few cases, defined contribution schemes are in the same overall scheme as defined benefit schemes. In these cases, if the pension fund is wound up with a deficit, you could lose out.
If you are likely to get a new job in the near future with a pension scheme, you could leave it where it is for the moment and transfer it to the new employer’s scheme.
If you have less than 15 years’ service you can transfer it to a PRSA. However to transfer it to a PRSA, you would normally need a Certificate of Benefit Comparison from an actuary which is expensive and means in effect that you should just buy a Buy Out bond. You do not need a Certificate of Benefit Comparison in the following circumstances:
- If the fund is less than €10,000
- If your pension scheme is being wound up.
I have a defined benefit scheme from my employer – what are my options?
You have two main options.
The scheme actuaries will estimate the transfer value which you may transfer to a buy-out bond. This would be a fund in your name with a pension provider.
You may leave it where it is for the moment with your employer and transfer it at a later stage. It will continue to grow or decline in line with the underlying investments, but your employer will stop making contributions.
If the scheme is fully funded, you will get a fair transfer value and you probably should transfer out of the scheme. Although the scheme is fully funded now, it might not be in the future and as someone with a deferred benefit you are the most affected by any deficit on winding up.
If the scheme is undefended at the moment, you have a much more difficult decision to make. Your transfer value will be reduced in line with the underfunding. If you opt to defer your benefits, this situation might improve if the company makes up the deficit. However, if you stay in the fund and the funding position deteriorates, you could lose even more.
If you have less than 15 years’ service you can transfer it to a PRSA. However to transfer it to a PRSA, you would normally need a Certificate of Benefit Comparison from an actuary which is expensive and means in effect that you should just buy a Buy Out bond. You do not need a Certificate of Benefit Comparison in the following circumstances:
- If the fund is less than €10,000
- If your pension scheme is being wound up.
I am over 50, but my employer/ scheme trustees won’t allow me to take early retirement?
This has become quite common. Allowing you early retirement can increase the deficit of the pension fund and your employer has probably reserved the right to do this. Check the rules of the Pension Scheme to make sure that they are allowed to do this. This is discussed further on Askaboutmoney .
I am over 50, and my employer/ scheme trustees has offered me early retirement.
You probably should take early retirement instead of a deferred benefit.
If the pension scheme is wound up at some future stage, those who have already retired will be safe. Those with deferred benefits will have them reduced in line with any deficit in the scheme.
However, you do need professional advice on this issue from an independent actuary.
Should I continue to contribute to my pension scheme while I am unemployed?
In general terms, it only makes sense to contribute to a pension scheme while you are paying tax at the top rate. So if your unemployment means that you might not be paying the top rate of tax this year, then you should not contribute to a pension scheme.
When you return to employment and the top rate of tax, then you should review this decision.
If you are going to be paying tax at the highest rate this year, and if you don’t need your redundancy lump sum, you may well contribute up to the maximum. Contributing to a pension is the best long-term way of saving.
Can I make a retrospective contribution against last year’s taxable income?
If you make a lump-sum AVC before the 31 October (or mid-November if using Revenue Online), you can set it off against your taxable income from the previous year. You would have to make this AVC while you are still in employment. This is discussed on Askaboutmoney .
At what age do I qualify for the state pension?
If you have sufficient contributions , you get the state transition pension at 65 and the state pension at 66. To qualify for the transition payment you must not be working. You can get the state pension whether or not you are working.
How does the pension scheme affect the tax I pay on the redundancy payment my employer is giving me?
This is covered in this article
Choosing a buy-out bond
You don’t need to buy one through your company’s pensions advisors, so shop around.
You may be moving the buy-out bond into your new employer’s scheme so watch out for up-front charges. A discount broker should be able to arrange a bond with lower charges. Ask Liam if there are buyout bonds with 0% entry and exit charges.
