# Deferred db scheme



## phoenix53 (2 Dec 2020)

First of all apologies if my terminology is not correct in this post.  I am member of a db scheme.  As I have left the company my pension is deferred to age 60.  
Every year I request a leaving service benefits statement because someone told me I should, so I do.  The statement shows an estimated pension paid at 60 and a transfer value.
My question is, if I were to transfer the money to a buy out bond and then buy an annuity at age 60, would the pension I could buy be the same as if I had left it with the co until pension age of 60, all things being equal.  If you decided at 60 you shouldn't have transferred out, the fund has grown etc, would the annuity rate you are given at 60 be the same rate the co would buy your pension at?  Hope that makes some sense.  Thanks


----------



## Conan (2 Dec 2020)

If you retain the right to the Scheme DB, then you have certainty as to your pension income at age 60. The amount of deferred pension should be indexed between when you left and age 60. The “certainty” is dependant on the Scheme remaining fully funded into the future.
If you take the Transfer Value and invest it into a BOB then you give up the Defined Benefit. How much it will grow in the future will obviously depend on where you invest it and how markets perform. At age 60 you then have a choice:
- buy an Annuity (similar to a DB pension)
- invest it into an ARF.
If you use the BOB to buy an Annuity, the amount of Annuity will depend on the size of your BOB fund, the type of Annuity you buy and Annuity rates at that time. But there is no guarantee that the Annuity you might buy will equal the DB pension you gave up. It might be higher or lower. 
So you must decide whether you want to retain the relatively guaranteed DB pension OR take the Transfer Value, invest it (you will have to decide what level of investment risk you want to take) and then when you get to age 60 (or later) decide whether you want to convert the resulting value into buying an Annuity or investing it into an ARF. The Annuity rate that you might be able to access should be similar to what the Scheme can access if you hold onto the DB . However thst depends on whether the Scheme would actually buy an Annuity in the open market or simple pay you a pension out of the Scheme (without offloading the risk to an Annuity provider - insurance company).
The real issue at this stage is what is the Transfer Value being offered and whether it really represents “value for money”. So if you took the Transfer Value and invested it to age 60 (and assuming a certain rate of investment return) what might that grow to at age 60.And then what Annuity might that  buy at age 60 (assuming you used current Annuity rates). You should seek expert advice before considering the Transfer Value route.
Hope this helps.


----------



## phoenix53 (2 Dec 2020)

That is a great help thank you.  I didn't know a pension could be paid from a scheme without purchasing an  annuity.  I suppose there is no point of transferring out if my intention would be to buy an annuity at 60.  its only 3 years away.  We are having a financial review done at the moment but I don't want to be railroaded into doing anything I would later regret.   I like to think things through so thanks so much for taking the time to reply.


----------



## Cameo (2 Dec 2020)

Most DB schemes would pay income which would be very generous compared to buying an annuity In the open market.

The one caveat depends on the financial position of the fund, it’s possible that future benefits could be cut.

I’d be wary of anyone saying a BOB would be a better option unless there was compelling evidence that the scheme was in financial difficulty.


----------



## Marc (2 Dec 2020)

Or the member is in poor health
Or the scheme represents a small part of their overall wealth 
Or they plan to emigrate
Or they are close to the Standard Fund threshold






						Planning for Retirement - Everlake
					

Retirement requires a professional assessment of how you want to live in your later years, and a clear strategy to achieve your objectives.




					globalwealth.ie


----------



## Marc (2 Dec 2020)

.


----------



## Cameo (2 Dec 2020)

I guess the op framed the question in terms of how an income payable from a db scheme compared to what might be available by purchasing an annuity from the proceeds of a BOB do not sure the reasons listed above are relevant 

think they’re considerations if you want to take a transfer value instead of the income form the dB scheme


----------



## Conan (2 Dec 2020)

If the OP is close to retirement (suggested 3 years away), the state of health would be important, potentially. 
So if the DB pension is a “single life pension” (ceasing on the members death and with no spouses pension ) and the individual was in poor health, then the Transfer Value might be an option for investing into an ARF (the value of which could be inherited as a continuing ARF by a surviving spouse).


----------



## johnkieran (3 Dec 2020)

Conan said:


> So you must decide whether you want to retain the relatively guaranteed DB pension OR take the Transfer Value, invest it (you will have to decide what level of investment risk you want to take) and then when you get to age 60 (or later) decide whether you want to convert the resulting value into buying an Annuity or investing it into an ARF.


Can they leave this decision until just before they retire? In other words retain the DB benefit and get a TV in theory the day before retirement age 60.  If that can be done are you not now in the best position to make an informed decision?


----------



## Conan (3 Dec 2020)

Possibly. But it all depends on the TV offered by the scheme and how much the Trustees want to offload the DB liability. In 3 years time they might not be willing to offer a TV.


----------



## johnkieran (3 Dec 2020)

Conan said:


> Possibly. But it all depends on the TV offered by the scheme and how much the Trustees want to offload the DB liability. *In 3 years time they might not be willing to offer a TV.*


So is it always at the discretion of the scheme trustees whether or not they offer a TV at any given time?
Or will the rules of individual schemes determine this?


----------



## Conan (3 Dec 2020)

No. It’s a matter for the Trustees (a proxy for the Employer) whether they offer a TV at any stage. Some Schemes will look for the opportunity to offload the DB promise, others not. It can depend on how well funded the scheme is.


----------



## phoenix53 (3 Dec 2020)

Cameo said:


> Most DB schemes would pay income which would be very generous compared to buying an annuity In the open market.
> 
> The one caveat depends on the financial position of the fund, it’s possible that future benefits could be cut.
> 
> I’d be wary of anyone saying a BOB would be a better option unless there was compelling evidence that the scheme was in financial difficulty.


That is what I was wondering Cameo, would the DB scheme pay better than taking the transfer value and trying to buy an annuity yourself?


----------



## Cameo (3 Dec 2020)

if i was you I would compare what the expected income from the DB scheme is against

the annuity payable based on current open market  rates is, I’d assume no future growth rate in transfer value but use your age in 3 years time. (and spouse’s if applicable)

but as per some other comments; you need to consider marital status. for exampe if you are single a single life rate may be better than what the scheme offers if it assumes a spouses pension

that would be my starting point but I’d also get profission all advice, I would not invest the BOB in anything risky if you need the income in three years time.


----------



## Conan (3 Dec 2020)

One possible point to bear in mind is that if the TV could be transferred to a PRSA (subject to certain conditions), on retirement you could possibly take 35% of the fund value as a lump sum (tax free up to €200,000) which might be higher than the equivalent lump sum under the DB Scheme. With the balanced you can either buy an Annuity or invest in an ARF. This might only be worth considering if the 25% tax free is significantly higher than the Scheme lump sum. Again, expert advice might be required.


----------



## phoenix53 (15 Feb 2021)

Hi all.  We're still working our way through this. We have spoken to a Financial Adviser and the latest figures are that currently the pension might provide circa 37000 pa from age 60 with a spouses pension of 2/3 in the event of my death following retirement.  This figure is before i take a lump sum.  If i was to take a tax free cash sum it would be circa 100000 and the pension would reduce accordingly.  The pension would also reduce by the amount of the state pension at state pension age.  The pension annuity is paid from the pension fund and not bought on the open market.  I understand that this carries risks into the future for pensions in payment, but right now the fund is well funded.

The transfer value is circa 800000,(now out of date as this was quoted 4 months ago, may be higher or lower).  If I were to transfer this to a BOB, and invest in a low risk fund,   I could aim to take 200,000 tax free at age 60.   The rest would go to an ARF with 4% drawdown pa boosted by some money from the tax free cash sum and some other cash we have.    My state pension would kick in at whatever the pension age would be and I would qualify for full state pension.  If /when I die, and if my spouse survives me, they will step into my shoes with regard to the ARF and if and when they die, there may be some money left over to pass on to my next of kin.

The idea of the guaranteed of the pension in the first option appeals but I wonder if I am playing it too safe?


----------



## Conan (15 Feb 2021)

If I work with the numbers you outline, then the DB figure might be :
- Full Pension of €37,000, or
- Lump sum of €100,000 Plus
- Reduced Pension of c€26,000 (my estimate)
On the other hand you might get a Transfer Value of c€800,000 into a BOB, which would allow you to :
- Take a lump sum of €200,000 tax free (25%)
- invest c€600,000 into an ARF

The attraction of the latter option is getting an extra €100,000 tax free and maybe you might be leaving some capital to children when both you are your spouse are deceased,BUT
- you give up the security of a guaranteed income for life (subject to scheme remaining fully funded)
- you have to make ongoing investment decisions for the ARF
- you must draw down a minimum of 4% of the ARF up to age 70, and 5% thereafter
- you have to accept that the value of the ARF will fluctuate, based on the investment profile you adopt
- unless you earn 4% or 5% (net of charges), the value of the ARF will gradually reduce (as will the 4% or 5% drawdown)
- depending on how long you live, you could outlive the fund (also depends on investment growth and rate of income drawdown).
So it might be attractive to opt for the extra tax free cash (the €200,000) but it comes with risks. Clearly, if your health was poor, if you family medical history is poor, then the BOB route might be more attractive. If however your health is good, your family history is good, then the security of a guaranteed income might be a priority. 
Not an easy (or simple) decision.


----------



## phoenix53 (15 Feb 2021)

More food for thought.  Still, it is a worthwhile process.  Makes you focus the mind.  Thank you for your input.


----------



## Marc (15 Feb 2021)

You don’t say how old you are now.
If there are a few years to age 60 it’s probable that your transfer value will increase overtime. They generally grow fastest in the final years -around 10%pa 
So, you could potentially obtain a larger lump sum than €200k
These decisions really come down to how significant the pension is to your overall financial position.


----------



## phoenix53 (16 Feb 2021)

Marc said:


> You don’t say how old you are now.
> If there are a few years to age 60 it’s probable that your transfer value will increase overtime. They generally grow fastest in the final years -around 10%pa
> So, you could potentially obtain a larger lump sum than €200k
> These decisions really come down to how significant the pension is to your overall financial position.


Hi Marc.  I'm 57.  Partner is contributing to a PRSA.  current value circa 400000 plus another couple of pension policies.  Value around 470000 in total.  they are 59 and would like to retire in the next 3 yrs or so.  i think they will take tax free cash and arf the rest.  If we could live on my db, they could leave their fund for a while longer.  we should have a lot of the main costs out of the way by then, mainly college going kid (1).   He works part time (non-pandemic times) and looks after his own spending, clothes, socialising etc.   We own our house and will probably downsize in time freeing up a few bob.


----------



## phoenix53 (16 Feb 2021)

Conan said:


> If I work with the numbers you outline, then the DB figure might be :
> - Full Pension of €37,000, or
> - Lump sum of €100,000 Plus
> - Reduced Pension of c€26,000 (my estimate)
> ...


Conan, you've been very good coming back to me.  With regard to all of the this, it is the DB that I find the hardest to get comfortable with regardless of the rest of our financial situation.  Up until a very short time ago, I was so happy with the DB pension and grateful for the guaranteed income.  I suppose speaking to a Financial advisor,  seeing 800000 written down, having the state pension paid on top of the 4% drawndown, instead of the DB reducing by the state pension amount and getting the higher tax free amount has caused me to stop and reassess.  I don't want to be greedy but I don't want to be tunnel visioned either.  I will take all the points above and consider them.  Thank you again


----------



## Marc (16 Feb 2021)

It’s easy to get blinded by the telephone number transfer value 

i set out the issues for consideration here https://joom.ag/3zKC

There are some strategies that you can consider and certainly worth getting a second opinion.









						Second opinion - Marc Westlake CFP, TEP, APFS, EFP, QFA
					

Please use this link to book a time for a quick assessment of financial advice you are taking or have received to establish if further investigation may be beneficial.




					calendly.com


----------

