Should I ditch my personal pension after new boss invited me to join the company scheme?
Your Questions: Peter McLoughlin, Principal of PML Financial Planning
I have just started a new job and have been offered the chance to join the company pension scheme. However, I already have a personal pension - a Personal Retirement Savings Account (PRSA) - which I have been paying into myself for the last ten years. Should I just stick with paying into my existing PRSA - or should I join the company pension scheme? Does either have an advantage over the other? Douglas, Ashford, Co Wicklow
I will assume here that your new employer would contribute to your PRSA in the event that you chose not to join the company pension. Employer contributions into a PRSA are liable to the Universal Social Charge (USC) so depending on your salary scale, this could have a major impact on your net income.
Employer contributions into a company scheme are, however, not liable to the USC.
Your company pension may have additional benefits such as death in service (which pays a lump sum to your dependants should you die before you retire) and permanent health insurance (which pays an income should you be unable to work due to injury or illness).
The cost of these benefits is borne by the employer in a company pension but it is not possible to have these included as benefits within a PRSA. You could, of course, arrange such benefits separately outside of a PRSA - but would your employer absorb the cost of these if they were included in the company pension and you chose not to join it? I doubt it somehow.
There are major differences between a PRSA and a company pension at the point of retirement when it comes to accessing your benefits. With a PRSA, you can take tax-free cash of 25pc of the fund - up to a lifetime limit of €200,000. The balance of the fund can be invested in an Approved Retirement Fund (ARF) or Vested PRSA - after you first invest €63,500 in an Approved Minimum Retirement Fund (AMRF).
The requirement to invest in an AMRF can be waived if you are able to meet the guaranteed minimum income requirement of €12,700.
With a company pension, you have two options when taking tax-free cash - 25pc of the fund (up to a maximum lifetime limit of €200,000) or one-and-a-half times your salary (assuming you have a minimum 20 years' service and you are taking your benefits under normal and not early retirement)
There are also differences between how a company pension is treated compared to a PRSA if the employee dies in service. With a company pension, the maximum tax-free cash that can be paid to the employee's estate is four times' salary - along with a refund of the member contributions. The balance is paid as an annuity to their spouse or dependants. With a PRSA, the full value of the fund is paid into the estate of the deceased.
In summary, a company pension sponsored by an employer is on balance more beneficial to you during your period of employment and at the point of retirement. Where there is a weakness with a company pension when compared to a PRSA, it is in the event of the death of the member while in service - where the member builds up a large fund and hasn't a large enough salary to allow their spouse or dependants extract sufficient tax-free cash from the fund. This would force the spouse or dependants to buy an annuity - and annuities currently offer very bad value for money.
I was a contractor more than 20 years ago and, during that time, I set up my own company. I opened a pension at the time but have long since stopped paying into that pension as I got a better one after I took up a job with a major multinational.
Although I only paid into my old pension for about three years, I'd like to do something with it. Charges seem to be eating into the value of that old pension. What options do I have?
Stephen, Deansgrange, Co Dublin
You have three options with your old company pension when winding it up. The first is to transfer the benefits into a Personal Retirement Bond (PRB); the second is to transfer the benefits into a PRSA, and the third is to transfer the benefits into your existing pension arrangement with your current employer.
Typically, transfers from a company scheme into a PRSA are only allowed if the period of service with the sponsoring company is 15 years or less - and if the value of the fund that is being transferred is less than €10,000 or if the scheme is being wound up.
The problem with transfers into an existing pension arrangement with your new employer is that they will be treated as an asset within the scheme and subject to the same retirement rules of your current employer's scheme. Therefore the benefits will not be accessible until such time as you retire from your current employment. If, however, you were to transfer the benefits into a PRB or PRSA, you could then access the benefits from the age of 50 - seeing as you have left service with your old company. However, if you chose to transfer the benefits into a PRSA, there would be only one option open to you to take tax-free cash at retirement - 25pc of the value of the fund.
Should you transfer the benefits from your old pension to a PRB or to your existing company scheme, you have the option of either taking 25pc tax-free cash at retirement - or up to one-and-a-half times your final salary as tax-free cash (as long as you meet certain conditions).
Transferring your old company pension into an existing pension arrangement is generally not the best option unless you couldn't previously access an Approved Retirement Fund (ARF) or Approved Minimum Retirement Fund (AMRF) with your existing scheme - and these options have since become available with your current employer. That may well be the case as ARF and AMRF legislation only came into being in 1999.
If it's a case that charges are eating into the value of the fund, examine what fund you are invested in. Is it the case that you are invested in a fund that is returning less than the annual management change of this fund - irrespective of the market conditions? A cash fund would be a classic example of this. If this is the case, you may need to consider moving to a fund that would potentially return more than the management charge of your fund.
Alternatively, is there another fund available which has a lower management charge? Remember, in times of market volatility and falling unit prices, funds exposed to such conditions will generally return less than the management charge while these conditions prevail. This will definitely be the case if you are not making any regular contributions and can't avail of euro-cost averaging - that is, where you invest regularly and get the average price of the units whether the market is falling or rising.
Sunday Indo Business