which severance package should i pick?

S

sbpension50

Registered User
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Hi,

I recently received correspondence from a previous employer,

I am 41 so 24 years left to retirement.

Option 1 €3125 p.a when i retire, roughly €60 a week

or

Option 2 €26,968 to transfer to my current pension

not sure which option to take??
 
I am sure you will need to give additional information.

Is the €3,124 linked to inflation?

How well funded is the pension fund? Might it get into difficulties later and adjust the pension?

Brendan
 
Not enough information.
- Are you currently in a pension plan?
- are there any attaching benefits to the €3,125 pension (spouses pension or indexation)?
- if this is a Defined Benefit scheme, how well funded is it?
- is the fund being wound-up?
 
Hi,
Yes i am currently in a pension plan
The pension will increase with the consumer price index maximum 4% in a year.
the pension is with mercer.
yes it was a DB pension.
 
Let’s say you opt for the transfer value. Depending on the rate of investment return you get over the next 24 years, it may be sufficient or not to buy an equivalent annuity to staying where you are.
If your €27,000 transfer earned a net 4% pa then you would have a fund of about €70,000
If your €27,000 transfer earned a net 6% pa then you would have a fund of about €107,000
The investment return is not guaranteed, will depend on what investment strategy you adopt etc etc.

If we assume that the Option 1 pension includes indexation from now to age 65, the current cost of buying an annuity of €3,125 (ignoring any indexation in retirement) would be circa €80,000. But if the €3,125 was to be indexed in retirement then the current cost would be circa €120,000.
But all that involves so many assumptions.
And if the €3,125 is the current deferred pension, then that itself has to be indexed up to age 65 thus making the projected deferred pension perhaps circa €5,000 (depending on the rate of indexation applicable over the next 24 years)

In addition to all the variables above, you need to consider the likelihood that the existing fund will actually be sufficient to provide the €3,125 in 24 years, ie will the fund remain solvent, will the employer still be in existence .
So is a “bird in the hand etc etc” better than a promise in 24 years time.

So you need to clarify if the €3,125 includes projected indexation (re-valuation) from now to age 65.
If yes, then the transfer offer seems reasonable.
If not, then the transfer offer seems poor.

As you will have gathered by now, this is not a simple decision or calculation.

Perhaps you might clarify the €3,125 number. That would help.

Apologies if I have only confused you more.
 
Thanks Conan, i'll ring mercer today for some information about the projected indexation (re-valuation) from now to age 65.
 
Hi All

So i rang mercer, and yes this is indexed each year to a maximum of 4%

"the transfer value quoted allows for a reduction of €2,153, which has been applied to your full transfer value of €29121, to take into account of the estimated level of the scheme, the amount is indicative only and would be recalculated to reflect the solvency of the scheme at time of transfer"
 
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Ok
If we assume 2% revaluation to age 65 that gives an estimated pension of €5,000 pa from age 65. Based on Mercers response you are not getting a full transfer value (presumably because the scheme is not fully funded).
Based on my earlier figures, you would need to earn a net return (net of fund management charges) in excess of 6% pa on the transfer value to buy an annuity of €5,000 (based on current annuity rates). This is based on a flat pension in retirement (not including any indexation in payment). Such a return would require a high(ish) risk profile, which might or might not work out.

So whilst the transfer value looks poor(ish) , you also need to consider the risk of staying with the deferred pension. Will the fund solvency remain underfunded, will it improve or will it get worse? Will you get the €3,125 (or circa €5,000) in 24 years time? Remember this figure is not guaranteed.

It’s impossible to know with any degree of certainty which option will work out best. Perhaps you need to consider to what extent your current pension will provide you with an adequate pension in retirement. Will the €3,125 be significant in 24 years time? Allowing for the underfunding of the deferred pension , you might think that having the transfer value added to your existing pension provides a degree of certainty and control.
Unfortunately my crystal ball is not as crystal clear as I would ideally like.

Nonetheless I hope this is of some help.
 
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