# Pension choice. DC or '50/50 risk share'



## connect (19 Mar 2012)

Hi all. I've recently started a new job and I have to make a decision regarding my pension. Company rules and all that. It's a once off decision and I've read the information relating to each option and I'm still finding it difficult to weigh up the pros and cons of each scheme. I've spoken to both colleagues and a financial advisor (briefly on the phone) and I haven't got any advice that has been useful. Can anybody here throw their opinion into the mix? I'd really appreciate it.

Here are the facts:
Age: 25
Retirement age: 65
Salary: €44000

*Option 1: Defined Contribution*
Up to age 29 - I contribute 5%, company contributes 8%
Age 30 to 39 - I contribute 5.5%, company contributes 9%
Age 40 to 49 - I contribute 7%, company contributes 11%
Age 50 to 65 - I contribute 8%, company contributes 14%

*Option 2: '50/50 risk sharing'*
consisting of 2 sections
- a DB section 40/80 style, at 2 times the state retirement pension, with a 120/80 style tax free lump sum. Up to a salary cap of €48000 in current money value.

- a DC section for the balance of salary above the salary cap of €48000.

Contributions are 5% of salary below the cap for me, and company pays 8.75% below the cap.

If I earn a salary above the cap, 5% of the salary above the cap is invested in the DC section retirement account. And the company pay 8.75% of salary above the cap.

If contributions were to be increased due to underfunding of pensions, the percentage increase is spread 50/50 between employee and employer.


So can anybody point out a few pros or cons relating to either scheme. It really is very confusing. At the moment I think the 50/50 option has less risk, and I like the idea of having a guaranteed amount at retirement. But I reckon I could receive substantially more with the DC scheme.

The advice the financial advisor gave me was to go for the DC scheme and pay as much AVCs as I can afford up to the max 15%. And select the risky international equities option rather than a managed fund. And as I grow older I  can move parts of my pension into more secure funds etc...


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## Baracuda (23 Mar 2012)

I think that this is a a decision that you have made already as you like the comfort of having a defined pension at retirement. I note that the retirement age is set at age 65 where you will not be able to draw state contributory pension until age 68. The question that should be asked of the trustees "have they built in cost of funding an extra 12,000 a year for 3 years?". I would doubt the trustees have but it could be possible. If they haven't you may be asked for a higher contribution in the years ahead or else they may change the scheme rules to extend the NRA to 68. Next question is what if the company is not in a position to keep its funding promises over the next 40 years before you retire. Currently there is very high protection for members in retirement should a scheme be wound up. There has been recent government proposals to rebalance this protection for active and defered members but it has been reported recently that this proposal has lost a lot of traction. Would you be happy with having to increase your contribution? These are the risks that are present in every defined benefit scheme. That said I am a member of a DB scheme myself and I would still perfer to be in this arrangement than a DC scheme. 

The risks with DC schemes is that you may decide to stay invested in a high risk stragity as you come to NRA and you could be exposed to massive losses such as seen in 2008. When you come to retirement it may cost a lot more to purchase a annuity than it currently costs and what could have been provided by the DB scheme. You take all the investment risk and you will either enjoy the rewards or the pain of this responsibility.

As you financial advisor pointed out you can contribute to an AVC and if your finances allow you should contribute to this regardless of what arrangement you opt for. You can still fund an extra 10% of your salary into a AVC as employer contributions are not taken into account against your 15% limit.

Armed with this info you should speak to a financial advisor face to face and discuss any concerns you may have with either arrangement before you make a decision as this could be one of the biggist financial decisions that make in your life next to buying a home.


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