If you have a job where your employer runs a pension scheme and you are a member, it is important to understand what will happen to your pension. Your options may depend on what kind of workplace pension scheme you belong to, such as a defined benefit scheme with a guaranteed retirement income, or a defined contribution scheme with an individual savings pot.
If you are old enough, your employer, or the rules of your pension scheme, may allow you to retire early with a reduced pension. In some cases, as part of a redundancy package you may be offered a deal more generous than normally on offer for those taking early retirement from your pension scheme.
You may also still be entitled to redundancy pay, but you should not confuse this with the lump sum offered by most pension schemes on retirement.
If you are not old enough to take early retirement, you should be offered some or all of the following options (depending on the scheme rules and type):
- Take your 'pension pot' and transfer it to a scheme provided by a new employer (such as an auto-enrolment scheme) or invest it in your own private pension scheme.
- Keep the pension with the scheme provided by the employer who is making you redundant. When you retire you will receive a pension from this scheme. This is known as a deferred pension.
- Get a refund of your contributions if you have only been a member of the scheme for a short period.
- Transfer to a 'buy-out' policy. You get a lump sum invested and a pension that will depend on how well the fund does. You are often guaranteed at least a minimum pension, but certain constraints may be imposed relating to the benefits accrued under your employer's scheme. You should take advice if you are offered a 'buy-out' policy. The Money Advice Service provides information on choosing an independent financial adviser.
Members should be told as soon as possible:
- what the value of their deferred pension would be;
- the value of a transfer payment to another pension scheme;
- their entitlement to a refund of contributions; if any; and
- the value of an early retirement pension and lump sum.
The Pensions Advisory Service provides more information about redundancy and your pension. It points out that if you have been offered a tax-free cash sum on retirement from your workplace pension scheme, this will have no bearing on your redundancy settlement. Both may be completely tax-free.
Deciding exactly the best thing to do with your pension is often very difficult and is another area where an independent financial advisor would be able to help.