Starting a pension at the earliest opportunity is an important part of ensuring you have enough money for retirement, but what happens to your pension benefits when you leave employment?
When someone leaves service, they will likely become entitled to a preserved benefit in the occupational pension scheme. An entitlement to a preserved benefit will apply where:
- termination of pensionable employment happens
- compulsory redundancy occurs
- the pension scheme is being wound up
For a Defined Contribution (DC) scheme, the preserved benefit will be calculated as the accumulated value of all contributions to the scheme. For a Defined Benefit (DB) scheme, it is more complicated and is related to the proportion of service completed at the time of leaving employment, compared to the total service that would have been completed, had the member remained in pensionable service to Normal Retirement Age (NRA).
The pension scheme rules will specify what level of preserved benefit is to be provided on the termination of employment, but it cannot be lower than the statutory preserved benefit stipulated in section 30 of the Pensions Act. The statutory preserved benefit applies where the member has completed 2 years’ service, and accrued retirement benefits in the scheme. This is called the qualifying service. Where a statutory preserved benefit applies, there is no refund of contributions to the member allowed.
Where a refund of contributions can be provided, it cannot include the employers’ contributions. The refund is also liable to tax at the standard rate applicable. An alternative option to a refund, is that the employee could transfer the value of their contributions to a Personal Retirement Savings Account (PRSA) gross.
Some DC schemes rules may provide a higher benefit on leaving service for those with less than 2 years qualifying service, which would include the employer contributions. This is referred to as Vested Rights.
The Pensions Act requires trustees of pension schemes to pay the transfer value to another arrangement. The options are:
- another occupational pension scheme
- a Personal Retirement Bond (PRB)
- a PRSA
- an overseas pension scheme
It is interesting to note, that the trustees have a separate right to make a compulsory transfer value to either a PRSA or PRB, 2 years after the member has left service, if the transfer value is less than €10k. Other than on a scheme wind-up, a transfer to a PRSA is not allowed unless the member is provided with a Certificate of Benefit Comparison and a Reason Why report.
The detailed information that the scheme trustees must provide to the member on leaving service is set out in sections 8-13 of schedule E of the Disclosure of information regulations. Such information included is as follows:
- rights and options re: preserved benefits
- how to claim benefits
- transfer value available
- statement of reasonable projections
For further information, please speak to your Financial Advisor or email firstname.lastname@example.org.
*Please note this content is the view of the author and not of Independent Trustee Company