What happens to your pension when you change jobs?

The day you finally get to put your feet up and draw your pension can seem like a very long way off. It’s no wonder so many of us aren’t entirely sure what pension pots we have, with who – especially if we’ve moved jobs a lot.

We grilled Senior Policy and Propositions Manager at the Money and Pensions Service, Adam Gifford on how to be pension-savvy when you leave a job or start a new one…

First things first

There are two main types of pension (more of which later) but whatever kind of pension you have, Gifford says when you change jobs, “the first thing you should do is check and make sure your contact details with your pension provider are up to date.” This will make ‘losing’ your pension much more difficult.

“Your pension is often set up based on your employment details, so your work email address, but obviously when you leave, that’s no longer necessarily where you want your emails going,” notes Gifford. “So go in and make sure your address, contact number and email are up to date with the pension provider. It’s also useful to update your nomination – this is where or who you want your benefits to be paid to if something were to happen to you.”

And if you have absolutely no idea where your pensions are, and no clue what contact details are on them, you can use the Government’s pension tracing service: gov.uk/find-pension-contact-details.

You may have pots with small amounts in, if you were only in a job a short while, but Gifford says it’s worth tracking all of them down, however small the amount. “Where we’ve got pots of less than £1,000, the Government is looking to try and ensure that they do just move across and get consolidated over time,” he says. “One of the dangers if you’ve got a small amount and you’re not contributing to it is the charges, potentially, depending on your investment, it might start to erode the value of it. It can be a good idea, when you’ve got a small amount, just to bring that into the new pension.”

Defined contribution pensions

Details all up to date? “Then you’ve got some choices about what you want to do,” says Gifford. “Defined contribution pensions are what the majority of people nowadays are in. It is effectively where the individual builds up a pot of money for retirement. Typically, your employer will be contributing and you’ll usually contribute a certain amount as well.”

“If you change jobs and you’ve got one of those, typically, all the contributions going in will stop, because obviously your employer is not going to pay those for you now that you’ve left the company,” he continues. “You can leave the pension where it is and it’ll continue building up over time based on where your money’s invested.”

Alternatively, based on the provider, “potentially you can continue making personal contributions” – a good option if you’ve gone self employed. It’s not always an option. If not, and you want to keep contributing to it, “you’d need to move it” into a new pension pot that you can contribute to.

“Your new employer will typically offer you another pension arrangement. That may be with a different provider to where your pension was previously, or in some cases, it might be the same,” says Gifford. Depending on the provider, if you already have a pension with them, you may be able to combine pots, or you may end up with multiple pension pots, all with different providers.

At this point, you could consider merging your pots with your new one. “It just makes it easier to keep track of over time,” notes Gifford. “What you’ll want to do is just check what the charges between your new provider and old provider are – although they’re generally quite competitive in these types of arrangements – then check your investments as well, just to make sure you’re happy with the new investment options.” If you’re happy with those “you should be able to bring those over, and then you’ll have one pension going forwards.”

Remember to check any “guarantees” attached to your pension before doing any merging. “This is more applicable for older pensions, but there are things like guaranteed annuity rates, protected tax free cash and pension ages with profits policies,” says Gifford. Don’t get caught out.

Defined benefit pensions

The second key type of pension “defined benefit pensions are where you’re building up an income for retirement, so they’re typically linked to your salary, and therefore you’re not building up a pot of money. You’re building up an income you’ll then get paid once you reach retirement age under the scheme,” explains Gifford. “When you leave one of these types of pension schemes, you become a deferred member. What you’ve built up in that pension remains, and then each year, typically, the scheme will increase the value of that income by a measure of inflation.”

When you change jobs, again, there are a number of options. “If you’re in a private sector defined benefit pension, or a funded public scheme, such as a local government pension service, then you can potentially transfer your defined benefit pension into a defined contribution pension.” This usually isn’t advised and isn’t always possible anyway, for instance “schemes such as the police or the fire service, you would not have the option to transfer out to defined contribution pension.”

Another option is “you can potentially transfer to another defined benefit pension” which acts similarly to merging DC pensions.

Money matters can be confusing at the best of times, and pensions can seem pretty intangible, but there are people who can help you make sense of it all. “Speak to your provider,” says Gifford. “If you are able to, it’s always worth getting financial advice [from a financial advisor] not least because they can make sure that everything is being done correctly, but also because they can assess your wider financial situation and help you think about a plan for retirement.”

You can also check out the MoneyHelper website for lots of free support.