When you leave an employer, any benefits that have been accrued in your pension will not be lost, as the fund actually belongs to you. This means that even though you are no longer working with that particular company, you will remain a member of their pension scheme and your money will stay invested as it was prior to leaving.
However, it's not always that simple because several factors come into play. These include the nature of your new job, how you wish to use your existing pot, and whether you're transferring or withdrawing your pension. This article will provide you with a clear understanding of what happens to your pension when you change jobs and all the options that are available to you.
Workings of Workplace Pensions
A workplace pension is a type of retirement plan that your employer will usually set up for you. It allows you to save money for later life while you're still in employment, and can be a great way to ensure you have something saved up for retirement.
In the UK, the government requires employers to automatically enrol their workers into a workplace pension scheme. In order to satisfy the requirements, the employee must:
Have an annual income exceeding £10,000;
Be employed within the UK;
Not be part of any employment pension scheme;
Be at least 22 years old and not yet have attained the age of State Pension.
Mind you, if you earn less than £6,240, you won’t be automatically enrolled on your employer’s workplace pension scheme. And if you earn between £6,240 and £10,000 a year, your employer is not obliged to automatically put you in the scheme, but you have the right to opt in.
Contributions
In workplace pensions, both you and your employer contribute money to the pension pot. You decide how much you want to contribute each month and can change this amount as you please. However, employers usually contribute a percentage of your salary into the pot each month.
The contributions made to the pension fund by you and your employer are determined by:
the specific type of workplace pension scheme you participate in, and
whether your involvement in the workplace pension scheme is a result of automatic enrollment or of your own choice.
The minimum contribution by an employer in the UK is 3%, while the worker contributes at least 4% of their salary. However, employers may choose to offer more, while workers can also increase their own contribution if they wish.
What Happens to Pensions When Changing Jobs
The fate of your pension after leaving your job typically depends on the type of pension scheme you have and the options that are presented by your pension provider. Let's explore these in detail.
If you've been a member of a defined benefit pension scheme
A defined benefit pension scheme is a type of retirement plan that promises you a specific income upon retirement, regardless of stock market performance or other factors. This means your pension provider guarantees an agreed amount of income when you reach the age set in the policy. The amount paid usually depends on your salary level and length of service.
What happens to it when you leave your work?
When you change jobs and leave the scheme, you will no longer have any ongoing accrual under the scheme. Your pension administrator will usually provide you with a pension statement showing how much you have in the pot.
You'd have the option to receive the funds as an immediate lump sum, or to opt for a series of regular payments in the future, also known as an annuity. Sometimes, you may even be able to get a combination of both.
If you’re young and the amount of money involved is relatively small, taking the lump sum might be the best decision, as inflation could significantly reduce the value of your pension over time. Alternatively, if you're close to retirement or have a larger amount of money in your pension account, it might be wise to consider the guaranteed regular payments of an annuity.
Can you transfer a defined benefit pension scheme?
Defined benefit pensions typically allow for transfers to a new pension scheme at any point up until a year prior to the date you're slated to begin drawing from your pension.
Once you've begun drawing from your pension, it's generally not possible to transfer your pension to another scheme.
Please note that not all workplace pension plans or personal pensions are open to transfers. For instance, civil service and NHS schemes are typically non-transferable. It's best to speak to an adviser or speak with the pension provider themselves to ensure the transfer is possible.
If you've been a member of a defined contribution pension scheme
A defined contributions pension plan is a type of retirement plan where the employer and employee make fixed contributions to a pot. The amount of money in the pot upon your retirement will depend on how much is contributed and overall investment performance (assuming it was invested). A good example is a Self Invested Personal Pension (SIPP).
What happens to it when you leave your work?
When you leave your job with a defined contribution pension, your accrued pension benefits remain yours, and the pension fund is still under your name.
You have the choice to either let your funds stay invested in the current scheme until you need it later, or you could transfer it to a private pension plan. Some providers let you continue contributing, but your employer won't be able to make contributions anymore.
If you switch jobs and continue paying into your previous workplace pension, you may lose access to certain scheme benefits, as some are exclusively for current employees. However, even if you stop making contributions to the scheme, you will still receive that pension once you attain the scheme's specified age.
Can you transfer a defined contribution pension scheme?
Yes, it’s usually possible to transfer a defined contribution pension scheme to a new provider. However, you should always get independent financial advice before transferring, as the performance of your investments could be affected by switching providers.
It’s important to review your pension arrangements at set time intervals. This helps you to evaluate the performance of your investments, make sure that you will meet your retirement goals, and ensure that you’re getting the most out of your pension scheme. You should review your pension plan at least once or twice a year (or whenever there is a significant change in legislation or market conditions) to make sure it still meets your needs.
Can I ‘cash in' my pension from my old employer?
The Pension Freedom rules indicate that access to your workplace pension becomes possible once you reach the age of 55. Once you reach 55 (or 57 from 2028), there are a number of ways to take money out of your old company pension. The initial 25% withdrawn can be taken as a lump sum free of tax, with subsequent withdrawals subjected to your standard income tax rate.
Cashing in your pension before retirement age can be an appealing option for people who find themselves in a difficult situation such as poor health. However, it’s not recommended as it can result in large tax penalties and reduce the amount of money you have saved for retirement. Additionally, you may miss out on potential growth opportunities by withdrawing funds early.
Your Options After You Leave Your Job
Once you leave your job and are no longer making contributions to your pension, you have three main options. You can decide to continue making contributions to your pension, transfer it to a personal pension, or transfer it to a new workplace pension. Here's all you need to know about each.
Continue to make contributions
You can choose to continue making contributions to your pension, even after leaving your job. This is often the preferred option for those who are close to retirement and have a larger amount of money in their pension pot.
The benefits of continuing to contribute are that you will benefit from compound interest over time and have more money saved for retirement. However, your employer will no longer be able to contribute since you are no longer an employee.
Transfer your pension
You can transfer your pension to a personal pension plan or a new workplace pension. This is often the preferred option for those who are younger and have relatively small amounts saved in their pension scheme.
Transfer it to a personal pension
A personal pension plan is a retirement savings plan you set up and manage yourself. You can open an account with a personal pension provider, make contributions into your account, and have the money invested in stocks, funds, ETFs, etc., according to your risk profile.
Setting up a personal pension is a fairly straightforward process. First, you need to choose a provider you are comfortable with. Then, you need to make your investment choice. Finally, you need to decide how much money you want to contribute and manage your pension going forward.
Transfer it to a new workplace pension
If you've switched jobs, you may be able to transfer your existing pension scheme into the new employer's workplace pension.
The first step to transferring a company pension is identifying the new pension provider and verifying that they accept transfers. Once you have found a provider willing to accept the transfer, you will need to provide important information, such as your current policy details and contact information, so that the new provider can get in touch with you for additional paperwork.
Get a refund of your contributions
If you decide that it’s not in your best interests to continue contributing or transfer your pension, you can opt to receive a refund of your contributions. Typically, pension schemes like those of NHS and Teachers' Pensions can refund your contributions if your employment spanned less than two years.
Merging Old Pensions
Merging old pensions is the process of combining several different pension plans into one. This simplifies your retirement planning, as you will have just one plan to manage and understand. It is often referred to as pension consolidation or ‘pension portability’.
Pros and cons of pension consolidation
- Easy to manage – Having multiple pensions managed in one place makes it easier to keep up with payments and access all of your pension information in one convenient location.
- Less likely to lose track of investments – With a single consolidated pension, it’s much easier to keep track of how your money is invested and where your contributions are going. This means you can make wiser decisions about how to manage your retirement funds.
- Potentially lower fees – Consolidating your pensions can potentially reduce fees paid on the administration of your pension. This can help to boost returns over the long term, as more of your contributions go towards investments rather than administration costs.
- You may be charged an exit fee – Depending on the type of pension you are transferring out from, you may be subject to an exit fee. It’s important to do your research and understand all of the potential charges involved before consolidating your pension.
- Some pensions cannot be transferred – Certain types of pensions, such as those provided by the National Health Service (NHS), cannot be transferred to another provider, so it’s important to double-check which ones you’re able to move.
- You may lose certain benefits with workplace pensions – Depending on the type of pension you have, consolidating may mean that you are no longer eligible for employer contributions or other perks that were associated with your original pension scheme. It’s essential to do your research and weigh up the pros and cons before making a decision.
How do I begin the transfer process from my old employer?
If you have decided to transfer your pension from your old employer, the first step is to contact them and inform them of your decision. This can usually be done via email or letter, and they will provide you with the relevant paperwork. Additionally, most providers can arrange a call if needed.
You need to confirm:
Whether your existing pension scheme permits you to move some or all of your pension pot, and
If the scheme you're considering will accept the transfer.
Generally, transferring your pension could cause you to:
Make regular payments to the new scheme;
Pay a fee for the transfer;
Lose any entitlement you had to take your pension at a certain age; or
Lose entitlement to take tax-free lump sums larger than 25% of your pension pot.
It's quite easy to trace any old pensions you have since your personal information is linked to each pot. Here are two options:
Contact HR – Your first step should be to contact the human resources department of your past employers, as they may be able to help you locate any pensions that were set up on your behalf.
Use the government's Pension Tracking Service – This is an online service that allows you to search for the contact information of any pensions you may have with past employers. While it doesn't confirm the existence of a pension, it can help to provide contact information for further enquiries.
Mitigating Changing Circumstances
Let's take a look at what happens to your pension if you change your employment circumstances drastically.
What happens to my pension if I become self-employed?
Besides taking charge of your business operations, becoming self-employed also means that you’ll need to make decisions about your pension.
The good news is that you do have options when it comes to managing your pension if you become self-employed. You can either opt to continue contributing to the existing scheme you had with a previous employer or explore personal pension providers for the self-employed.
Can I lose my pension if my company is sold?
If your company is sold and you remain employed by the new owners, then your pension should continue as normal if your new employer chooses to continue with the current provider. If the sale costs you your job, then you should be able to transfer your existing pension to a new provider based on the requirements of your next employer.
If your company goes under due to insolvency or bankruptcy, then what happens next depends on the type of pension you had.
If you were enrolled in a defined benefit workplace pension, the pension you've accumulated remains secure. This is because the pension's assets are independently managed by a trustee company.
If you were in a defined benefit plan, then you're likely covered by the government's safety net, the Pension Protection Fund (PPF).
If your employer ceased operations after you've reached your scheme’s standard retirement age, rest assured that your pension would be provided in full. However, if you were younger than the standard retirement age when your employer went under, you can expect to receive around 90% of the promised pension value.
What if I don't have a new job?
If you remain unemployed after leaving your job, you still have options when it comes to managing your pension. Depending on your provider, you may be able to continue making contributions to your existing scheme. Otherwise, you can consider personal pension plans like SIPP accounts that are designed to help people save for their retirement regardless of employment status.
