Why might you consider taking a Transfer Value from your Defined Benefit Pension?
- Defined Benefit ('DB') Pension Schemes offer a Guaranteed Income in Retirement but just how good is that Guarantee and what other options do you have?
- There are two key risks associated with DB Pensions - (I) Life Expectancy and (II) the Solvency of the Scheme.
- If we take a simplistic example of somebody who has a DB Pension of €50k p.a. and let's assume no indexation or Spouses Pension for a moment. If the Person died having received only 2 years pension, they would only have received €100k whereas if they lived 30 years they would have received €1.5 million - a massive difference!
- Most DB pensions also incorporate a Spouses Pension meaning that if the main recipient dies, their Spouse subsequently gets a reduced Pension (typically 50%) for the rest of their lives but it ends on their death.
- Most DB Pensions have closed in recent years as Employers have found them too expensive to fund. The majority of DB Pensions are underfunded and Employers often choose to reduce the promised benefits rather than plug the shortfall. Therefore the 'Guaranteed' Income is not always as certain as you'd think.
- Another reason you might prefer taking the Transfer Value is the control and flexibility it would give you. You could decide when to access your benefits, what the Pension invests in, how much income to take (you would no longer be limited to a specific amount each year) etc.
- You would also be able to take 25% of the Fund as your Lump Sum at Retirement whereas with a DB scheme your lump sum is based on years service and pensionable salary.
- Taking a Transfer Value gives you (and your Family) greater certainty of your outcome because you take control of your Pension Fund and will receive the full benefit from it as even in the event of your death any money remaining in the Pension Fund will go to your Dependants.
- Returning to the example above of the Person with a promised Pension of €50k p.a., they might be offered a Transfer Value in the region of €750k which is equivalent to 15 years pension. Is that better or worse than €50k p.a.? The answer depends on how long they live and what they do with the €750k Pension Fund. If they invest it wisely they should be able to earn a return on the money which will add to the fund.
Where might Property fit into this decision?
- Property is an interesting option for Pensions as it offers a combination of Income (from Rent), Capital Preservation (as the Pension owns the bricks and mortar) and Capital Appreciation over the medium to long term. You'd also expect the rental income to rise over time.
- You choose the Property (Residential or Commercial) but it must be at arms-length from you so your pension can't acquire a property that you or anyone connected to you already owns, nor can you rent property to any connected party. These Revenue rules ensure the integrity of the transaction.
- Take a look at the video below which explains how property might be ideal for ARF's (Retirement Funds). It can of course also be acquired pre-retirement with Buy out Bonds and other Pension types.
If you would like further information or to discuss your situation in more detail, contact us using the form below or call (01) 293 7200