Take care in moving jobs

Ireland's workforce is on the move. Increasingly, the idea of people joining one company and staying there for life is becoming a historical anachronism.

The new reality was recognised in the Pensions (Amendment)Act 2002, which reduced the vesting period - the time an employee must serve with a company offering an occupational pension scheme before being permitted to join that scheme - to two years.

As recently as the 1990 Pensions Act, a five-year vesting period was seen as a perfectly reasonable provision for the realities of the workforce of the day.

One messy side effect of a reduced vesting period and increased worker mobility is the prospect of people having a string of small pensions with a number of employers.

A significant consideration for people moving jobs now is what to do with the pension benefits that they have built up with their previous employer.

So what should people do about their accumulated pension benefits?

The 1990 Act determined that occupational scheme members should have a number of options, each of which is designed to ensure that they are not forced to surrender benefits accumulated under a previous employer.

The 2002 amending legislation widens the scope of those measures to the benefit of the employee. Essentially workers cane choose one of three options. They can:

preserve the benefits they have built up in a particular scheme;

transfer those benefits to an occupational scheme offered by their new employer

transfer the benefits to a insurance policy, generally known as a buy-out bond.

Preserved benefit means that your entitlements are frozen at the point you leave the company but that any benefits accumulated to that point are preserved until you reach retirement when they are paid out according to normal pension rules.

For people in defined benefit pension schemes, where the retirement income is determined by the number of years served and an employee's relevant pay, working out preserved benefit can be somewhat complicated.

However, the Pensions Board runs through the relevant formulae in a booklet "What Happens To My Pension If I Leave?" which is available on their website www.pensionsboard.ie.

The situation is simpler for members of defined contribution schemes where retirement income is dictated by the performance of contributions made by the employer and employee over the term of employment.

In this case the value of the sum of the contributions and any investment gain is the preserved benefit.

Transferring the benefit again sounds reasonably straightforward but that is not necessarily the case.

The idea is that the current cash value of the benefits you have built up in an occupational scheme are transferred to:

your new employer's occupational scheme;

an approved insurance policy or contract - a buy-out bond;

a Personal Retirement Savings Account.

However, if the scheme you are leaving is a defined benefit scheme and is not fully funded - a widespread problem for Irish companies in recent years - the value of benefits transferred may be less than the benefits you would be entitled to had you stayed with the original employer.

The PRSA transfer option is also available only to people who have not built up more than 15 years' membership with their existing employer's occupational scheme.

The advantage of a buy-out bond is that you gain greater personal control over the investment choices for your money.

You can choose the provider and also which type of fund the money will be put into.

This is especially beneficial for younger workers moving between positions.

An occupational fund is constrained in the risks it can take but a younger individual can choose to take more risks with their money early in their working life.

For people moving job within the two year period, preserved benefits and transfer options apply unless your employer's scheme has a lower vesting threshold than the minimum laid down by law.

In such cases, you will only be able to obtain a refund of your own pension contributions - and not any that your employer might have made on your behalf to a scheme.

Which option should you choose? Well, it depends on the type of pension that you have.

As a general rule, if you are moving from a defined benefit scheme, preserving that guaranteed benefit is seen as the best option.

If you are in a defined contribution scheme, you need to look at the performance of both the fund in the company you are leaving and the one in your new employer.

It may be that it proves more beneficial to leave your money where it is rather than move it to a fund that has an investment policy with which you are less comfortable or which has not performed as well.

A buy-out bond will offer greater flexibility in how your money is invested and, especially if you already have some pension benefit preserved in a defined benefit scheme, can allow you to be maybe a little more adventurous with your pension savings that an employer's scheme might be. Ultimately, it is down to the individual. The one thing you cannot do is pretend the issue will go away.

Ignoring your pension for now could have a significant impact on your income when you eventually retire.