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Oran Hall Insights into the portability of pensions

The portability of pensions refers to the ability to transfer pension entitlements from one approved pension arrangement to another.

Portability is very important as it helps to set the stage for employees to enhance their ability to get a worthwhile pension when they retire.

The options available to the member of a superannuation pension plan rest largely on the rules of the pension plan and what they allow or do not allow. Considering that such rules vary by pension plan, it is important for the members of pension plans to become familiar with them so that they can be guided in the actions they can take when necessary.

Employers should also make it their duty to ensure that the rules of the pension plan are available to their employees.

There are three options typically available to employees who are leaving an approved pension plan due to a change of employment: cash refund of the employee’s contributions, leaving both the employer’s and employee’s contributions in the plan, and transferring the contributions to the pension plan of the new employer.

In some cases, the employee who opts to take a cash refund of contributions may be able to leave the contributions from the employer, which will then be used to provide a pension when the contributor retires. In other cases, a plan member opting to take a cash refund of contributions may lose the employer’s contributions, thereby reducing the chances of getting a good pension at retirement.

People who take a cash refund, that is, they port the funds to themselves, risk using the funds for purposes other than providing for a pension, thus reducing the amount available for their pension when they retire.

The plan member who opts to leave the employee’s contributions in the plan can, with the employer’s contributions, look forward to a reasonable pension at retirement. The employee is also able to join the pension plan of the new employer and thus get a pension at retirement or contribute to an approved retirement scheme, or ARS, if the new employer does not have a pension plan.

The employee who opts to transfer both the employee’s and employer’s contributions may do the transfer to the pension plan of the new employer or to an ARS if the new employer has no pension plan.

People who are in employment situations where there is not an employer-sponsored pension arrangement are able to participate in an ARS. The maximum portion of the person’s income that can be contributed to the scheme is 20 per cent. The scheme member may contribute the full 20 per cent, but some employers participate as well. The contributions of the employer become vested immediately as they go into the scheme on behalf of the scheme member. The employer may contribute up to the difference between the employee’s contributions and 20 per cent of the member’s income.

Retirement scheme members are not able to get a refund of their contributions from an ARS. They may transfer their contributions to another approved pension arrangement or leave them in the scheme to secure a pension, meaning that the funds are used to buy an annuity at retirement to provide a guaranteed income for them.

The employee, then, may transfer all contributions to the superannuation plan of the new employer. The new employer who does not sponsor a superannuation plan may opt to contribute to the ARS to the same degree as the former employer. If the new employer is not inclined to contribute to the ARS for the benefit of the employee, the employee may increase the level of contribution up to 20 per cent of income.

One big benefit of contributing to an approved pension arrangement is that the contributions are not taxed and the investment income earned on the invested funds is not taxed. Retirees, however, are taxed on their retirement income to the extent that it exceeds the portion of income that is given tax relief.

The priority of every person who is a member of an approved pension arrangement – a retirement scheme or a superannuation plan – is to secure a pension that can provide at least a liveable income in retirement.

An opportunity to port pension contributions and the income earned thereon is not an invitation to squander such funds but to immediately move them into another arrangement to seamlessly continue to prepare for a good retirement income.

– Oran A. Hall, author of Understanding Investments and principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and counsel.

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