Closure of company pension

88engine

Hello. I am new here and need some advice on what to do with my pension.

The company I used to work for, and who currently hold my pension fund, are changing pension providers and shutting down the existing scheme. They have written to me with four options. I am only 24, so nowhere near retirement age, but I still want to make the right decisions now to ensure I am comfortable when I retire (hopefully at 55...!!). Having worked for them from the age of 18 to 23 I have just under £5,000 in my pension. I am not due to start work at my new employer for another week, 1st July 2013, and I suspect (although I haven't checked) I will have to wait about three months before I can set up and start paying into the pension scheme they provide - and therefore can't transfer this existing pension pot into it.

The options I have been given are as follows:-
Option 1 - Have my benefits automatically secured through the purchase of a Section 32 Policy chosen by my previous employer. They have said that this is the default option and will be actioned if I do not respond.
Option 2 - Transfer benefits to my own pension arrangement. For this I assume I would need to set up my own Section 32 Policy (which may better suit my needs/circumstances compared to the default one - ??) as I am [probably] unable to action the pension arrangement with my new employer.
Option 3 - Draw your pension - not applicable to me as I am not over 55.
Option 4 - Exchange benefits for a Winding Up Lump Sum (WULS). The description for this states that 25% will be tax free and the remaining 75% will be taxed with an emergency tax code - I assume 20%, so that is fine, as it's only on 75% of the pot rather than the whole lot. I've calculated I will be entitled to £4,171 plus change (using the actual amount, £4,907.11, although it says this is NOT guaranteed, as I had based it overseas = more risk and fluctuating markets.

I am getting married next year and have recently bought a house, so the money would come in handy, but I also want to ensure I am more than comfortable in my retirement - it's only £5k, will that make much of a dent in my final pension pot given I have another 31 years of working and contributing until my planned retirement?? Would withdrawing it affect anything to do with my drawing my pension later in life? Is it more advisable to just keep it in there (in the default Section 32 Policy - or my own? - until I can transfer it to my new employer's pension scheme.

I'm really not sure what to do and would appreciate any help, guidance and/or information from anyone in the know or with more experience than me.

Thanks!

atush

yes, it will make a dent as that 5K will have a long time to grow.

Ask them how long you will have to transfer, and ask your new employer when you will be allowed to contribute, and if 3 months will they allow you to transfer in before this.

xylophone

First check the transfer situation with your new employer?

jamesd

Avoid the section 32 option unless this is a defined benefit scheme. You'd probably need to pay an IFA to transfer out of a section 32 plan and that wouldn't be cost-effective for the amounts involved here.

Your pension choice does not need to be a section 32 one, it can be any personal pension.

A winding up lump sum is a good choice, particularly if your new employer offers the ability to make pension contributions by salary sacrifice. Salary sacrifice saves you the NI as well as the income tax, so you can make money by taking the lump sum with only income tax deducted from 75% of it, then recycling it into new pension contributions.

Winding up lump sum is what I'd do with the situation here.

atush

but they aren't going to use the LS that way, they are going to spend/waste it on a wedding.

Using pension money for spending now is the worst solution.

jamesd

The winding up lump sum is still the best of the options. If used for pension contributions it results in a larger pension pot value than the other options.

Whether it should be used for the wedding is a slightly different question. That same spending could instead be financed by not making future pension contributions and/or borrowing funded by future pension contributions that aren't made.

At 24 there's a good deal of time to catch up and someone who's already paying attention to pensions at a younger age than most. So I'm generally content if the money is used to fund the wedding and replacement pension contributions are made instead of funding things with borrowing. Provided the spending is reasonably prudent and not treating the pension pot money as free money to fritter away.

88engine

Thanks for your responses everyone. I think I'll look into getting it transferred into a personal plan for 'x' amount of time before I can start paying into the new scheme. I definitely want to be more than secure when I retire and I am (fairly wishfully) planning to retire at 55, so I need as much as I can get in there. The wedding can be funded through saving etc, but I can't replace what I've got in my pension as I can only choose a contribution per cent once a year - too high would wipe out that 5k and more and too low wouldn't come close to matching what I have in already. Transfer to my own policy has to be the best option, I think. :-)

I think I just seen the pound signs and thought 'oooh, lump sum...'

Thanks again for your discussions!