Q&A: Dominic Coyle, Irish Times, 1st August 2017
‘I’m hoping you can give me some general guidance on a pension matter. I will be leaving my job next month after 10 years to return to college.
I have a defined pension contribution with my employer (Investment fund name Dynamic Pension and investment with Zurich). The current value stands at approx €65,000. Do I just leave it sitting there and transfer it to a new employer when I start a job in two years hopefully? Or someone mentioned to me about converting it to cash so that it doesn’t lose its value?
Pensions are foreign territory, so any help would be greatly appreciated!’
Ms M.O’D., email
Pensions are foreign territory to pretty much everyone, not least because there are so many different scenarios and the industry itself does little or nothing to make them more readily understandable.
I can pretty much guarantee that, regardless of what I say to you, someone in the industry will contact me to tell me that there was a different approach that I should have considered.
For this reason – and more importantly because you have significant savings of €65,000 tied up in this pension – it is important that you talk to an independent financial adviser, not be someone from Zurich which, naturally, cannot consider itself independent as it currently manages your fund.
Having said all that, there are a few things you should consider .
The Dynamic fund in which you are invested seems to have performed at or above average over the past decade or so. That’s hardly surprising as it is currently 92 per cent invested in stock market shares, or equities as they are also known. Stock markets have enjoyed sustained growth in recent years, and generally outperform other asset classes over the long term.
This is fine if you are younger with a reasonably long horizon before retirement. As you come nearer to retirement age – and you have less time to recover from nasty investment shocks – most advisers will move you away from equity-heavy funds to something with a lower risk profile, generally with a heavier weighting of cash and government bonds.
As you don’t give me any indication of age and retirement expectations, I can’t comment further. What I can say is that the Zurich Dynamic fund is classed as medium to high risk by the company itself, with a ranking of 5 on a scale of 1-7. You can find an explanation of Zurich risk rankings here: https://www.zurichlife.ie/funds/risk-ratings/.
As this is a defined contribution scheme organised through your current employer I assume you will have been given some advice of selecting this fund in the first place, and are happy to take on a reasonable amount of investment risk in the hope of securing higher investment returns – though your comment about “foreign territory” does make me wonder.
So what are your options now?
In general, when you leave an employer – and assuming you have been there more than two years, as you have been – you have three alternatives:
1. Leave it there: you can leave the pension where it is in your employer’s scheme and it will continue to grow (or diminish) according to market movement. It may well be open to you to move the savings within the employer’s fund to a slightly lower risk investment option if you are concerned about volatility, but you should certainly take professional advice before doing so. You will not be able to add further to this fund once you have left your current job.
When you retire, as with any other pension you have at that time, you will be able to draw some of it down in cash and take the rest by way of an annual annuity payment or transfer it into an Approved Retirement Fund where it can remain invested and, hopefully, continue to grow.
2. Purchase a buy-out bond: a buy-out bond, or a personal retirement bond as it is also known, allows you to transfer your current benefits to a personal pension plan controlled by you. You can change the way it is invested but you cannot add further to it. Your choices at retirement are the same as with any of the other options.
3. Transfer to a new employer’s pension scheme: obviously this is not relevant during the time of your study but you could still transfer from your current scheme to a new employer’s scheme when you secure work after your course. Any decision to do so would be based on the investment options offered by the new employer compared to your existing one and the charges involved.
In your particular case a fourth option is available. You can transfer the money for your current pension fund to a Personal Retirement Savings Account (PRSA). As I understand it, this is confined to people with less than 15 years’ service with their employer, which seems to cover you.
Given the size of your fund, however, you would need to secure something called a Certificate of Comparison highlighting the advantages and disadvantages of such a move. It examines the benefits you are likely to receive under your current scheme and the benefits likely to accrue within a PRSA. It comes with a written statement explaining why a transfer to a PRSA is in your best interest. That certificate and statement could cost you €2,000 or more.
The advantage of a PRSA over, say, a buyout bond is flexibility in that you can continue to add to the PRSA even while in college if you choose but also when you go back to work. You also have considerable control over how it is invested.
However, unsurprisingly, charges on individual PRSAs tend to be higher than you would encounter in group schemes, say with an employer. Also, an employment-based pension scheme generally offers additional benefits such a death in service and permanent health insurance should you no longer be able to work due to illness or injury.
There is also the question of whether your new employer would be willing to make contributions to a PRSA if they already fund an occupational scheme. Employer contributions are a big factor in helping your fund grow.
So, which option should you choose?
That all really depends on you, but you should consider carefully the charges associated with any of the options before selecting one. Charges eat into investment returns, and a small difference in charge can have a large impact on your final pension fund. If you are paying more the fund needs to be delivering a notably better return to overcome that impact.
You also mention the prospect of converting it into cash “so that it doesn’t lose its value”. Two things arise.
First, as you are in your current scheme more than two years, you cannot liquidate it – i.e. get your cash back, albeit after tax. The money is now locked into a pension fund of one sort or another until retirement.
You could transfer the money – possibly even within your current employer’s scheme or else through a buyout bond or a PRSA – so that it is invested only in cash. You would eliminate a lot of the volatility inherent in a fund invested heavily in equities. However, you would also be sacrificing any opportunity for that investment to grow as it will need to to provide a reasonable retirement income.
And the scheme will still lose its value. The impact of inflation will eat into the value of cash anyway. While inflation is low currently, it still has a cumulative impact over time, and policymakers are actively trying to raise the rate of inflation to around 2 per cent per annum.
In addition, a cash fund still has management charges even if they are lower than with an actively-managed equity fund, and those will also eat into the value of your pension.
Personally I don’t think a 100 per cent switch into cash makes any sense for you, but that is speaking as a journalist who writes in this area and not as a qualified professional investment adviser.