Starting a new job is a pretty emotional time.
My guess is that – right now - you’re either excited, nervous, or something just short of petrified.
Every night you just seem to lie there in bed, unable to get to sleep as a thousand great ideas for how you can add value spin around your mind… Or, alternately, you’re constantly waking at 4am in a cold sweat worried that you’re doing the wrong thing; wishing that you could turn the clock back and shred your resignation letter.
That’s exactly how I’ve felt before every move I’ve made in my career. And I know that’s how most of my friends and colleagues also feel mid-move.
No wonder then that you just want to get it all over and done with. You want cut short the next few weeks (or months), quash all the uncertainty and get on with establishing yourself in your new role.So you grab a copy of the latest edition of The First 90 Days (a great book from Michael Watkins) and set about your preparations.
But there’s a problem… A big problem.
The thing that most people miss before starting a new job
You see, in all the change, the emotion and all the planning there’s one thing that, in my experience, the overwhelming majority of job movers forget to consider.
And the financial cost of forgetting to think this thing through is enormous. That’s no exaggeration.
What is it?
I’ve lost count of the number of people who have ploughed on, negotiating their severance terms and their new packages without fully considering the impact of moving job on their retirement provision.
The most important thing you can do before starting a new job is to review your pensions.
Following the same footpath could have a dramatic – and negative – effect on your pension savings AND could create an eye watering future tax bill if you’re not careful.
So put on hold your job plans for 5 minutes. Here are 5 reasons why you should review your pension before you go any further.
It’s the most important thing you can do before starting a new job.
Reason #1: Leaving your pension with your old employer will probably slow it’s growth
Pension fund rules are awash with small print, some of which could quite easily trip you up.
One of the most common clauses that cause an issue for people relates to differential charges between active members and deferred members, ex-employees who still have benefits accruing but who are no longer contributing to the scheme.
Many schemes charge much higher administration fees for deferred members. A briefing provided to MPs by Which?, the consumer group, found that workers were typically charged an annual management fee of 0.5 per cent to 0.7 per cent for a pension. After they leave, the fee rises to 1.2 per cent to 1.5 per cent.
The impact of these charges is that the future growth of savers’ funds is limited as more of the investment returns are siphoned off as management fees, leaving less in the account to grow in future years.This can be cataclysmic for retirement income.
Such a big increase in fees potentially wipes out a quarter of a worker’s pension by the time they retire.
It’s important to consider all options for the pension pot you’ve built with your last employer as you leave. These include leaving your savings where they are, moving them to your new employer’s scheme, moving to another pension you might have or even setting up a completely new pension from scratch. Only then can you be sure that you’re maximizing your future wealth.
Reason #2: You might lose your savings altogether
You would think that any pension savings you’ve built up with a company is protected. The money’s yours and no-one can touch it.
Amazingly that’s not the case! Many occupational schemes provide that the company’s contributions shall be returned to it where employees leave the scheme within two years of joining.
I got a new job and wanted to transfer my pension pot to my new firm, but upon getting in touch with my scheme administrator, they told me that since they couldn't get in touch with me, they said my pension pot had been transferred to the trust and as such is no longer mine.
And given that works now hold an average of 11 different jobs during their career, that’s a rule that will affect a considerable number of people.
Regretfully, there’s nothing that can be done about such reclaims.
However, some scheme rules also provide that EMPLOYEE contributions will also be sacrificed if the pension isn’t transferred out to a third party pension within a short period following the employee leaving the company.
“Move it, or lose it” is the principle adopted.
It’s important to confirm if these or similar rules apply to your last employer’s pension.
Reason #3: You might be better off NOT taking such a generous pension in your new role
The last five years have seen the Lifetime Allowance slashed by nearly half, to just £1m. That’s the maximum nominal value of a pension you can hold before being hit by a possible 55% tax surcharge.
When you start be drawing benefit from your pension (by taking a lump sum or setting up regular withdrawals) HMRC assesses the value of your pension.
For defined contribution schemes that process is easy. It’s the value of your pension pot. However, for defined benefit arrangements like final salary or CARE schemes, the calculation is more complicated. The HMRC will instead consider the value of your future income benefits.
You may be surprised to discover that quite modest final salary benefits can give rise to substantial valuations. A final salary pension of £25,000 a year would be valued at £1m!
If you’re not mindful of the likely future value of your pension, you might find yourself breaking the lifetime allowance and receiving a tax bill of (quite possibly) £100,000 or more at the moment you give up work. Ouch.
By assessing the current and future value of your existing pension arrangements you can form a view as to whether it would be better to negotiate a cash alternative to your pension with your new employer. That way you could avoid the surcharge by, for example, making additional contributions to ISAs instead of making further contributions to your pension.
Reason #4: You might save money by paying more into your new employer’s pension
If you’re not at risk of breaching the lifetime allowance you may like to consider negotiating a salary sacrifice arrangement with your new employer.
This time, you’ll agree to pay MORE NOT LESS into your pension.
Doing so allows you to take advantage of the lucrative higher rate tax relief provided on pension contributions. If you’re paying income tax at 40%, this means the government will top up every 60 pence you save into your pension with another 40 pence. That’s an immediate 67% return on your investment. Quite attractive.
The crazy thing is that using salary sacrifice to pay more into your pension won’t reduce your take home pay. So there’s no need to worry about having less money to spend.
And doing so will actually save your new employer money by reducing their national insurance contributions. Perhaps you can negotiate a share of that saving?
Understanding your current position and the options available help you unlock significant additional value from your new role, just by structuring your package in a slightly different way.
Reason #5: Your income needs in retirement will probably have changed
Most people use career advancement to enhance and enrich their lifestyles. That means bigger houses, better cars and more expensive holidays.
Do you want to give up every one of those new luxuries the moment you retire? Probably not.
Making a review of your retirement plan as you move jobs (and trade up in terms of lifestyle) allows you to make the necessary adjustments to your contributions in a timely manner.
Leaving the decision to up your pension savings for just 10 years will force you to double your extra contributions to close up the gap... Or you can accept that you’ll need to cut back on your lifestyle when you retire, just when you’re in a position to finally start enjoying life!
Leaving the decision to up your pension savings for just 10 years will force you to double your extra contributions to close up the gap
Of course, it may also be the case that you want to downsize; to go the other way. A change in the health of a family member might be the trigger for a decision to live a simpler life.
The need for reviewing your pension contributions still applies. Except this time you’d be reducing your contributions not increasing them.
It’s now, or never
It goes without saying that once you’ve negotiated your new package, it’s unlikely that you’ll be able to open up the conversation with your employer again.
That notwithstanding, the reality is that you’ll not likely get around to reviewing your pension in the same depth. Life is way too busy; especially when you’ve just started a new job.
Without wishing to judge, I would be very surprised if you did get around to any review later. It just doesn’t happen.
So - whether you’re thinking about a possible career move, actively pursuing new opportunities or have just started in a new role – now’s the time to review your pension. The financial benefits of doing so could be substantial and you’ll certainly be better off by investing the time right now, while your attention is focussed on these things.
At the risk of repeating myself, it’s the most important thing you can do before starting a new job.
If you’ve got any questions, ask them in the comments section below or feel free to contact me directly if you prefer.