# Pension - Buy Out Bonds Query



## fayf (26 Nov 2013)

New here, and some of the other posts have given me some pointers on Buy Out Bonds.

I  am in a company pension scheme, fund is worth 260 k at the moment, 17  years service, and for various complicated reasons I am considering  leaving the job in the coming months, so this would not be a redundancy  situation.
Salary 58,500, and in the scheme for 16 years. Current age 45.

Have been looking at the various Buy Out Bond options, and need clarification on a few items.
Are these statements correct.

Would  I be eligible to transfer into a buy out bond and take benefits as  early as 50 years old. One can drawn down as early as 50 years old, may  not advisable but checking the facts.

What is the maximum tax  free lump sum payment that I could take, based on the above, that can be  taken at aged 50. Assuming fund value 260k.

What would the estimate be on the ongoing pension amount after drawdown at 50.(assuing max tax free lump sum taken).

Tips  on transfer charges and ongoing management fees and other charges, I  understand there is an exit charge if one has the buy out bond less than  5 years, and activates it, within the chargeable  period.


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## fayf (12 Dec 2013)

fayf said:


> New here, and some of the other posts have given me some pointers on Buy Out Bonds.
> 
> I  am in a company pension scheme, fund is worth 260 k at the moment, 17  years service, and for various complicated reasons I am considering  leaving the job in the coming months, so this would not be a redundancy  situation.
> Salary 58,500, and in the scheme for 16 years. Current age 45.
> ...



Any assistance on this welcome.


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## Smoneen (12 Dec 2013)

Hi fayf. On leaving service yes you would be eligible to transfer to a PRB. Is your current scheme DC (defined contribution) or DB (defined benefit) as this will impact the type of TFC (tax free cash available to you)? If from DB then the TFC calculation will be related to salary & service, if DC you might be able to get 25% TFC. I'm assuming that you're not a 5% director based on the info above.
 You are correct to note that drawing down benefits at age 50 might not be in your interest & you should seek proper financial planning advice if this is something that you are considering. 
In relation to charges you have a decent fund value so you should have your choice of options in the market. Again a good financial advisor/planner should be able to provide you with comparative illustrations across a range of allocations & management charges & go through a complete risk or file with you so as to determine which provider / product best suits you. In relation to early exit penalties they are generally related to the terms of the product that you are taking out. A high allocation with a 1% amc will typically have 5/4/3/2/1 penalties in the first 5 years. A lower allocation with a lower base amc could have 4/3/2/1, 3/2/1 or even nil early surrender penalties. The charges will most likely depend on how you are paying for the financial advice i.e. let advisor earn commission from the provider or you pay the advisor directly.


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## GSheehy (17 Dec 2013)

You should be able to negotiate a BoB with no entry/exit charges and an AMC of less that 1% for the level of funds you are talking about.


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## North Star (17 Dec 2013)

Hi Fayf;

In your circumstances we would generally suggest the client should consider taking the higher net allocation rate up front in return for accepting early exit penalties. Our rationale is that as you are unable to access the funds before 50 (and even then it may not be in your best long term interests to access the cash) - then exit penalties are a minor consideration and the higher net allocation rate is in your favour.

As to your query on estimated pension at 50; if we assume you get a 102% net allocation rate ( how much of your funds are invested for you on day 1) and the funds grow at 4% per annum after all costs, then at age 50 (assuming a full 5 years growth)  the buy out Bond will be worth €322.6k. At age 60 the equivalent number would be €477.6k
Annuities are very expensive and annuities at age 50 are particluarly so.
Lets assume that you can take 25% of the fund as tax free cash then at 50 you have just under €242k to invest in an annuity and €80.6k tax free cash. This will purchase an annuity which will provide a pension of just over €5k per annum which inflates at 3% and is guaranteed for 5 years.
If you can select an Approved Retirement Fund then you can draw this down from 50. The returns are not guaranteed and you will be running the investment risk. If you work on the assumption of net investment returns meeting your annual 5% income drawdown ( a big assumption !) then at age 60 this can provide an annual income of €17.9k and leave the capital untouched. Please bear in mind these numbers at age 60 etc should be discounted back to todays terms and will be lower ( to take account of inflation)

As you can see there are a lot of assumptions involved, and if these pension funds are important to you then paying for some hopefully profesional and helpful advice might be money well spent.

All advisers should be able to clearly lay out the cost structure options and the various pros and cons. 
The harder piece is the important and often neglected piece, i.e how do you suggest/recommend that we invest to meet the 4% (or whatever target you have ) return after all costs, required to deliver the required amount at 50/60.

If you have the time, ask several adviser firms to provide you with terms and investment recommendations - the best way to get price/value discovery. Then you can assess what is good value and which investment approach makes the most sense for you. Apologies for the long reply but it is hard to answer queries like this with short replies. I hope this helps.

Regards Vincent


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## North Star (17 Dec 2013)

hi again Fayf,

You may need to check that the current scheme allows you the ARF option and if not see if the Trustees will amend the rules to allow members access to ARFs.

Vincent


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## fayf (17 Dec 2013)

Thanks for the tips and advice to date.

To confirm, the Pension Scheme is Defined Contribution, and I am not aware of any ARF options.

Regarding the annuity figures, it seems to be difficult to get real information on this. I did eventually find this website, where one can play around with different scenarios.(In Sterling so converted back to Euro)
Google: annuities calulator find.co.uk
(I can't post the direct link as I have less than 15 posts)

Is there an equivalent Irish website. I am assuming here that the UK website, is a good guide to checking these annual annuity figures.(all in Euro)

Assuming fund value of 300k at 50, 25% lump sum is 75,000.
Taking the max cash sum at 50(75k), and leaving a balance of what I estimated conservatively at 225,000, the resultant annual annuity payments, brought up some very different figures, e,g,:

1) Single Life: 10,302 (no inflation provided for, no partner provision)

2) Joint Life (100% to partner): 9,507 (no inflation provided for)

3) Joint Life: 5,342(100% to partner): (3% inflation)

The last one is roughly the same as what was posted by North Star.

One can see there is a massive difference between 2) and 3)

Why would one bother with a 3%  inflation pension, when one can be guaranteed 9,507, forever. State OAP kicks in at 68.
and there is always work options in between.
It would take, around 20 years from drawdown, to get from the (inflation protected)5,342 up to the (no inflation protection)9,507 at 3% per annum.
Yes, people are living longer but the difference in drawdown payments over the first 20 years are approx 47k more, on the non inflation protected option, 
and it takes until year 37 from drawdown (age 87) before the payout cumalative incomes converge. Worth the gamble, I would say.

Plus, one would have the lump sum invested also, and taking an income from that. If one planned it right, one could take around 100 per week from the 80k, bringing the total income up to around 15k p.a., not bad, if the mortgage is paid off, kids college funds are already put away and plenty of savings also(in addition).


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## North Star (18 Dec 2013)

The equivalent Euro annuity numbers as per your 3 scenarios would be;
option 1 8026 p.a
option 2 7144 p.a
option 3 4232 p.a 

These assume that there is no guaranteed period for the annuity and that your partner is the same age. The inflation hedge is effectively a longevity issue and you are correct to look at it. In our calcs you will be 85 before the inflation option adds more value. Like any type of insurance it does add secuity though.
The annuity rates will improve the older you are when you take out the annuity, so if you say there may be additional work available then if possible hold off on buying the annuity until required.
If  I were you I would look into the Approved Retirement Fund (ARF) options and see if it is available to you. if you do not have the ARF option then your tax free lump sum is not based on 25% of the fund but is based on service which could lead to a higher or lower tax free cash amount. If you have the ARF option then at least you can choose the better/more  suitable of the two options

Once you have made your decision/plan then we suggets you focus on the following;
1) getting best value Buy out Bond
2) deciding what investment strategy/approach makes the most sense for your preferences and in particular avoiding any large drops in value which would then result in a lower annuity pension
3) when you come to purchase the annuity- shop around as the rates offerred vary significantly

Regards Vincent


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## Sunny (18 Dec 2013)

Vincent, they were some of the best written and helpful answers I have seen in a while.


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## Gerry Canning (18 Dec 2013)

Sunny said:


> Vincent, they were some of the best written and helpful answers I have seen in a while.


............................................................................................

Vincent can you give me a short guide on this please.
Aged 65 , has 2 retirement bonds each worth 100,000.
Wants to take (pension) now .
Wants to have joint with spouse .
Wants 1st survivor to have half ongoing pension.
Pension guaranteed for 10 years.
With inflation @2.5%.  
..............
Even a quick guesstimate of what pension would be, would assist them to start the checking process. 

Thanks.


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## fayf (18 Dec 2013)

North Star said:


> The equivalent Euro annuity numbers as per your 3 scenarios would be;
> option 1 8026 p.a
> option 2 7144 p.a
> option 3 4232 p.a
> ...



Very helpful, thank you.

Regarding Inflation, it definitely, does not stack up for me, that it takes 35 years before the inflation included annuity option, outperforms, a non inflation annuity option. Add to this, the value of money now, rather than in 35 years time, and it effectively becomes a bit of a joke !

Is there an Irish website, that one can see these annuity rates, where one can change the age of drawdown, change fund values etc. ??

Regarding service, I have 17 years service with my current employer, what effect does this have on the tax free lump sum ??

"Guaranteed Period", can anyone clarify this. 
If one has a partner the same age, and one chooses 100% to go to them on your death, then, what difference does a "guaranteed period" option make, as they will get the full payment that was paid to you, after you pass on.

Where would be a good place to start with the shopping around between different providers ?


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## North Star (18 Dec 2013)

Gerry,

Under the scenario you have outlined, there will be €200k to purchase an annuity (if we ignore any tax free cash amounts) and if your spouse is the same age then this purchases an annuity of €6.676 for you with 50% spouses pension for your spouse i.e €3,338

These are just from one provider as an indication, better rates may be avilable in the market place.

With a non inflating annuity the amounts increase to €9,028 and €4,514 respectively.

Is this enough info for you at this stage?

Regards Vincent


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## Gerry Canning (18 Dec 2013)

Vincent; 

Have already let him know.
His and spouses biggest issue was to get even a loose grasp on what they might get.

At circa k10 on a bit of inflation proofing , they are happy. 

(Looks like a couple @65' need circa k20 in pension pot for each k1 pension between them).

Thanks VERY much for your prompt help.
Have a good Christmas


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## North Star (19 Dec 2013)

Gerry;

You are very welcome, At the relevant time make sure he checks or gets his adviser to check with all the providers to see what the most competitive rates are. There are a small number of annuity providers so its not a big job to check rates from all of them.

Regards Vincent


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## North Star (19 Dec 2013)

fayf;

Based on the info you have provided, if you select the annuity option your tax free cash amount would currently be €65.8k and 25% of the fund (if you select an ARF) would be €65k - i.e no difference. However if your Buy out Bond grows as indicated above then at 50 the tax free cash amount with the ARF option would be €80.6k and at age 60 €119.4k ( assuming no changes to pension tax free rules). The tax free amount under the annuity option would be unchanged unless there were changes to your length of service or salary. The difference is material enough to warrant you taking time to have a good look at the ARF vs Annuity option.

Re shopping around re the providers a good adviser/broker is probably the best starting place. Different advisers have diferent ways of operating, there are good threads here on how to find an adviser and what questions to ask. You will also see advisers here posting on various threads and you can guage from their input whether or not they seem  well placed to add value to you or not. Ask a few firms and guage who offers the best combination of value and service. 

Regards Vincent


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## fayf (23 Dec 2013)

North Star said:


> fayf;
> 
> Based on the info you have provided, if you select the annuity option your tax free cash amount would currently be €65.8k and 25% of the fund (if you select an ARF) would be €65k - i.e no difference. However if your Buy out Bond grows as indicated above then at 50 the tax free cash amount with the ARF option would be €80.6k and at age 60 €119.4k ( assuming no changes to pension tax free rules). The tax free amount under the annuity option would be unchanged unless there were changes to your length of service or salary. The difference is material enough to warrant you taking time to have a good look at the ARF vs Annuity option.
> 
> ...



Many thanks for explaining the tax free lump sum differences, under the ARF OR Annuity option.

I will certainly look more closely, at both options, to see if they are both available, as clearly a larger tax free lump sum, is preferable, as one can invest part or all of this, also (securely of course).


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## fayf (13 Jan 2014)

I have been researching the annual fees involved in a Buy Out Bond.

"No transfer fees" is easily available from multiple companies.

So  far, the annual fees seem to be around 1% (or less)though I am unsure of where to go to get  a comprehensive list fees from the various companies. 
The best I have seen so far is around 0.75% annual management charge. Seeing as the fund is significant  at around 260 K, could I expect a better annual charge than this ?

In  terms of the allocation rate %, what should I be expecting ? I would  have thought it would be 100%, e,g, the value of the fund which is  currently circa 260k.
Irish Life for example have these allocations for their "Complete Solutions Personal retirement Bond 1"

Contribution Amount/Investment Percentage
<€20,000 95% - 103%
>€50,000 96% - 103%
>€100,000 97% - 104% 
>=€100,000 98% - 105%
Transfer value per year - As per single contribution

I am wondering what would the impact of a higher 105% allocation rate would be. If the customer gets an extra 5% allocation on top of their fund value, then, I smell a catch somewhere.
The reality is that this has to be gotten back somewhere, probably in charges.
The standard exit charges in the first 5 years of a policy like this, is not an issue for me, as I am 5 years off the earliest drawdown date of 50 years old.


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## LDFerguson (14 Jan 2014)

There tend to be two generic types of charging structure for products like this: up-front additional allocation coupled with higher annual charge or lower allocation at the start coupled with lower annual charge.  The job you (or your broker) need to do in evaluating which is best is to figure out how many years you expect the monies will be invested.  Then decide if the reduction in annual charge multiplied by the number of years compensates you for the loss of bonus allocation at the start.  As a very general rule of thumb, lower annual charges tend to favour those with longer to go until retirement and higher allocations tend to favour those closer to retirement.  But with €260,000 to consider, it's certainly worth while doing the research to see how it works out in your specific case.


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## Conan (14 Jan 2014)

Also worth bearing in mind that fund annual management charges tend to vary depending on the fund type. So Cash Funds have lower charges than  say Equity Funds and multi-manager funds tend to cost more than a single manager fund. 
You either need to do research as to what structure will suit you best or employ a Pensions Consultant.


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## fayf (15 Jan 2014)

Conan said:


> Also worth bearing in mind that fund annual management charges tend to vary depending on the fund type. So Cash Funds have lower charges than  say Equity Funds and multi-manager funds tend to cost more than a single manager fund.
> You either need to do research as to what structure will suit you best or employ a Pensions Consultant.



Thanks for the tips.

Still shopping around, but have found what I believe is a fairly good deal. 

101% allocation, and 0.75 % annual charge.
You get the first 6 fund transfers per year at no additonal cost, but this is fairly standard. 
There is also scope to negotiate a little better on this, as the fund is fairly substantial, and even if it's in place for only 5 years, thats at least 10,000 to the provider in annual charges.

The majority of the fund choices are 0.75%, with a smaller number with higher charges. In my specific case, there is only possibly 5 years before retirement at 50, so best to go with a more cautious fund which is 0.75 % initially, and if I don't draw at 50, I can be more adventourous then.

My research also stumbled upon another Annuity Product I had not heard of before. An "Investment Annuity", bascically it pays out less than a standard annuity, but if you die, the whole balance of the fund goes to your estate. It has only recently been available to those with Defined Contribution Pensions.

 It's something I am going to look at in more detail.


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## jxwell (23 Jan 2014)

That seems like a good deal ! Can you please give any more details which product and company ? Is the allocation percentage & amc anyway related to the fairly large fund value or would they apply to lower amounts also ? Kind regards


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## fayf (24 Jan 2014)

jxwell said:


> That seems like a good deal ! Can you please give any more details which product and company ? Is the allocation percentage & amc anyway related to the fairly large fund value or would they apply to lower amounts also ? Kind regards



Thats through AIB, but, it's an Irish Life product, as they re sell their products, but they can offer lower charges (than standard)due to the volumes they sell for Irish Life. I have not got the product name to hand.

These are standard charges as far as I know(through AIB), in fact, I might be able to do better on the charges given the size of the fund. This just involve asking the sales person to push for a better deal.

Have not finished shopping around though, it's well worth doing extensive research on this.


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## GSheehy (24 Jan 2014)

fayf said:


> Thats through AIB, but, it's an Irish Life product, as they re sell their products, *but they can offer lower charges (than standard)due to the volumes they sell for Irish Life*. I have not got the product name to hand.



This is utter BS and typical of the bank direct sales spiel. They tell you that you're getting something special but it's just not true.

It looks like the 'Complete Solutions' product. 101% allocation but exit penalties of 5/5/5/3/1% in years 1 to 5. 3% commission.

I've yet to see a pension, savings or investment product available from a bank that you can't buy cheaper elsewhere on the market.


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## fayf (27 Jan 2014)

GSheehy said:


> This is utter BS and typical of the bank direct sales spiel. They tell you that you're getting something special but it's just not true.
> 
> It looks like the 'Complete Solutions' product. 101% allocation but exit penalties of 5/5/5/3/1% in years 1 to 5. 3% commission.
> 
> I've yet to see a pension, savings or investment product available from a bank that you can't buy cheaper elsewhere on the market.



I agree with you completely, which is why I am still looking around. 
To be fair, the exit penalties for the the first 5 years, are very common with most(but not all,suppliers) for this product.

I've been around the block a few times, and I have not purchased any financial product through a bank, since the 1990's, for the exact reasons you specify.


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