Am i better to move the pension to a differnet scheme?

Calvin001

When i was working with a large development company in the boom years (for two years) i was added to the company pension scheme (i paid a contribution monthly, and the employer matched it). In '09 i was made redundant with all except two of the others. I enquired about moving the pension out of the company scheme, but as it was my pension, i was told there was no harm in leaving it there.

Now i've received an email from the broker looking after the scheme, to advise that the pension "is in a medium to high risk fund and highly invested in equities. This may not be the most suitable for you going forward as equity markets will not continue to perform this way every year"; He also advises that "a series of Multi Asset funds offering diversity and specifically targeted towards attitude towards risk in their"

I'm in my mid 30's, and dont see an issue with 'a medium to high risk fund', but wonder if being 'highly invested in equities' is good or bad.

Also, "the trustees of the scheme wish to move deferred members from the scheme and their pensions from the control of the trustee to the individual"

Am i better to move the pension to a differnet scheme?
Your thoughts appreciated

coylemj

Calvin001 wrote: »

I'm in my mid 30's, and dont see an issue with 'a medium to high risk fund', but wonder if being 'highly invested in equities' is good or bad.

At your age you should be heavy into equities and about 10 years or so before you intended to draw on the fund, start moving it 10% at a time to a less risky fund. There will be peaks and troughs along the way but you need to keep your nerve because long term equities always deliver the best returns.

The broker wants you to move because he will pocket c. 2% or more of the money by persuading you to move it to a different fund.

SBarrett

Unless the trustees wind up the scheme, you don't have to move from the existing scheme. The catch is, you will need a trustee to sign off on your pension when you want to mature it in 20-30 years time. Do you want to keep track of the trustees for that time? I blogged on your options recently, I will paste it after this (I can't post urls as I am a new user)

Offering an investment strategy without even talking to you and gauging your attitude to risk, goals, capacity for loss is something to think about. There is no one size fits all when it comes to investing. There are a number of steps that should be followed before deciding on how you should invest your money.

SBarrett

What happens to your pension when you are made redundant?

Unfortunately, since the death of the Celtic Tiger, a lot of people have been made redundant from their jobs. A lot of these jobs had pension schemes attached to them. What happens to your pension when you are made redundant? There are a number options that are open to you.

Leave your pension where it is

Your pension is set up under trust, which means that it is not an asset of the company and therefore safe from the liquidator and creditors. If you wish, you can just leave the pension where it is and wait until your retire before maturing it.

You have no control over the investment funds. This means you can only invest in the funds made available by the trustees. You cannot switch between funds without the trustees signature.
You have to keep in contact with the trustees of your pension. If you are a long way from retirement, this may prove difficult as trustees die, companies merge, are bought out or close down.
If you are in a defined benefit pension, you need to be aware of the scheme funding levels. Most Irish defined benefit schemes are in deficit and if your company is making people redundant, it is likely your pension scheme is too. The issue of defined benefit schemes is a bit more complex and I wrote a piece on this previously.
Transfer pension to a Buy Out Bond

A Buy Out Bond is a pension designed specifically to receive the retained pension benefits from employer pension schemes. They are also know as Personal Retirement Bonds.

You will have complete control over the investment process and can make investment changes yourself.
You will have access to the full investment range on offer from the chose insurance company, whereas under most company paid pension schemes, there is a limited fund choice to members.
You are bound by the same rules as the company pension scheme, so things like the retirement age will remain the same. You also have the option of drawing down your pension benefits from age 50 if you want.
If you were in a defined benefit scheme, you will now be assuming all the investment risk and it is unlikely you will receive the same benefits at retirement as a fully funded defined benefit scheme. Again, read my previous piece on this before making a decision.
If you transfer to a buy out bond, you can always transfer the benefits to a new employer pension scheme in the future.
When you mature the bond, you can either take up to 150% final salary as a tax-free lump sum (dependent on years service) and purchase an annuity with the remainder or take 25% of the fund value tax-free and invest the remainder in an ARF.
Transfer pension to a PRSA

A PRSA is a different type of pension that was set up by the government. It is similar to a Buy Out Bond in that you can have a great fund choice. If transferring from a company pension plan, there are some stipulations before you can transfer.

You must have been in the scheme for 15 years or less; or
The scheme is being wound up or you are changing employment.
If the fund is worth more than €10,000, a Certificate of Comparison is required. This document compares the benefits that would be received if you stayed in the scheme and the benefits if you move to a PRSA. The cost of having this completed varies.
At retirement under the PRSA, you take 25% of the fund value tax-free and you can either purchase and annuity or invest in an ARF with the remainder.
Transfer pension to a new employer scheme

If you get new employment and there is a company pension plan in place, you may transfer your benefits to the new scheme.

You keep your benefits in once place.
Under company schemes, you have to be a member of the scheme for 2 years to be legally entitled to the value of the employers contributions. If you transfer the retained benefits into the scheme, the service under your previous employer count towards the 2 year requirement under the new pension scheme!
Get new employer to take over as trustee

Your new employer can elect to take over as the trustee of the old pension plan and start contributing to the plan. This really only applies to one man executive pension plans. It is especially useful if you start up your own business and your company can act as the trustee.

SBarrett

Investment Process

Back in the 2000′s, when all was good in the world, people didn’t care where they invested their money, it all when up anyway. It was only when things crashed that they said to you “I didn’t know I had invested in Chinese equities!” As an advisor, I am determined to learn from the mistakes that we all made back then when giving investment advice. I developed an investment process with the intention of taking the surprises out of investing. It is not fail proof but if client expectation is managed at the outset, there is certainly less room for error.

Investment Process Step 1 – Psychometric Testing

I ask pension and investment clients to complete a psychometric risk tolerance questionnaire. I use an independent company, Finametrica, for the software to complete this process. A lot of people use the risk tolerance score as the basis for their recommendation. For me, it is the beginning.

Investment Process Step 2 – Assessing Suitability

Next I ask a number of questions to find out more information about the actual investment.

What is the purpose of the investment? Is there a goal to be achieved? - Most people have never thought of the goal they want to achieve. They want to invest it and see what they get at the end. This is where good financial planning comes into play. By assessing your financial needs, you can work out the goal.
For how long do you wish to hold the investment? – Is it a pension investment with a long term or a short term investment?
Risk Required – What return is required? If we know the goal, we can work out the return required.
Risk Perception – how risky does the action feel to you? During the Celtic Tiger, property didn’t feel like a risky investment to anyone in Ireland. Would that be the same today? The risks must be explained.
Risk Capacity – The most important of the lot. Can your financial situation withstand the impact of a worst case outcome? A client of mine loved gambling and scored in the top 5% of his psychometric test. But his ARF was the only money he had to live on, it had to do him for the rest of his life. He simply couldn’t afford to take my risk with his ARF as his lifestyle would be seriously altered if the fund value fell drastically.
Trade-Off Decisions – After working with people on the returns required to match their goal, we can assess whether their goals are achievable with taking the level of risk they are comfortable with. If not, they can lower their expectations, increase risk or put in more money. This way, people can make informed decisions at the beginning of the investment.
Investment Process Step 3 – Investment Policy Statement

The final step in the investment process is the production of an Investment Policy Statement, laying out how the investment process works:

Diversified investment portfolio designed to match your risk profile, with an emphasis on asset allocation.
Details on rebalancing. If there is movement of the asset allocation of more than 3% in a year, your portfolio is reset back to the original asset allocation. This reduces the volatility you are exposed to and you also sell high and buy low.
Details on time horizons, risk profiles and expectations
Historical returns so you can see how similar portfolios have performed in the past.
Investing isn’t an exact science and guarantees cannot be given on what returns you will get. But by following investment processes, you can help people to manage their expectations and invest in assets so they won’t have sleepless nights worrying about their money.


Steven