Vesting Your Pension Funds
Finding some extra pension fund money sounds like good news. Whatever job you’ve had, you’ll likely have been putting money into your pension or your 401(k). It’s also likely that the company will have been putting money into that fund. That’s money that you probably didn’t even notice. You might not even have been aware that you ever received it. It’s just sitting there waiting for you to claim it.
The bad news is that you might no longer have it — and this is something you need to consider before you quit your job. While the money that you contribute to your pension fund is always yours, the same isn’t true of the pension money that your employer gives you.
Companies have different policies, but a common approach is for companies to impose a vesting period. Leave the company within five years of arriving; for example, you may lose all of the funds that the company contributed to your pension or your 401(k).
The idea is to give employees a reason to remain with the company. The longer they stay, the more of the company’s contributions to the 401(k) they get to keep.
There is No One Vesting Period
The vesting period of different companies may vary considerably. One company may allow employees to take everything after they’ve passed five years. Other firms might give 20 percent of the company contributions after three years, 40 percent after five years, and so on.
Quitting your job will have repercussions for your pension. The money you’ve put in from your salary will always be available to you. You can either roll it into the retirement fund that opens at your next company, or you can tap it when you reach retirement.
You will need to remember, perhaps decades later, that you have money waiting for you, but it will be there, and it will be yours. You’ll just have to remember to look for the money that you’re entitled to receive.
The pension contribution that you receive from your employer could be at stake, though, when you leave the company. You might be able to take all of it, some of it, or none of it at all if you leave at the wrong time.
Before you fire your boss then, you should find out what the vesting policy is in your company regarding pension contributions. You might find that gritting your teeth and hanging on for just a few more months could be worth tens of thousands of dollars and even hundreds of thousands once you reach retirement age. It’s worth checking out the actual dates and waiting for the best exit strategy.
Pensions and the Self-Employed
Employees have a relatively straightforward pension path. If they’re lucky enough to have a defined-benefit pension, then they won’t have to worry at all. They can count off their years and look forward to receiving a predictable, reliable pension as soon as they retire.
If an employee has a 401(k), they can adjust their own payments, and they can receive matching payments from their employer. The employer will have set up the retirement fund for them.
The employee won’t need to do any research or start talking to financial planners to choose the best plan for them. Everything will be arranged. They just have to make their payments, keep track of the rise in value, and bear their pensions in mind when they move to another job.
But for the self-employed, things are a little more complex.
Someone who works for themselves doesn’t have anyone to set up their pension fund for them. There’s no defined-benefit pension waiting for them when they stop working. There isn’t even a 401(k) in place to which they can start making their own contributions.