Best option on wind up of Defined Benefit Scheme

[Brendan Burgess]

An employee of Enable Ireland has asked me the following question.

Their DB scheme is being wound up and they are being offered the following options for the transfer value

1) Enable Ireland Defined Contribution Scheme
2) A buy-out bond constructed for them by Aviva
3) Their own buy-out bond
4) Their own PRSA

My initial view is that the costs which will be deducted from the Enable DC scheme are likely to be much lower than the costs of any of the other schemes.
It is a lot simpler to have just one scheme to worry about, although two schemes is not a problem.

Are there any other factors?

She is likely to remain an employee of Enable Ireland until retirement.


Brendan

 

[Brendan Burgess]

Irish Life has an excellent document comparing the options

[broken link removed]

As far as I can see, if she stays in her current scheme, she will get a tax free lump sum of 3/80ths of her salary for each year of service or 25% whichever is the higher.

With the PRSA, it will 25% of the fund. It is likely that the 3/80ths option will be higher.

Can I clarify this bit?

You can take retirement benefits under a prsa from age 50 if you leave employment

You can take retirement benefits from company fund if you leave the employment to which the benefits relate.

Does this mean that the company scheme is far more flexible? To access the prsa, you must stop working?

 

[leroy67]

[broken link removed]


Personally speaking would prefer buy out bond Brendan

 

[Brendan Burgess]

Thanks leroy, but why?

 

[LDFerguson]

I'd check the charges on the Enable Ireland DC scheme before assuming that they are lower than other alternatives.

With a Buy-Out Bond you can retire from 50 onwards regardless of what your employment position is.

With a PRSA you can retire from 50 onwards if you are retiring from PAYE employment only - self-employed people can't. There's nothing to stop you going back into another employment after you've drawn down your PRSA benefits.

A Buy-Out Bond offers the same methods of calculating the lump sum as the original scheme, so the 3/80 method would still be available.

 

[leroy67]

Hi Brendan,

Why I would take the BOB over PRSA

3/80th rule or 25% are both available for Tax Free Lump Sum option,
25% rule on PRSA only.
If you decide to retire at 50 with more than 20 years service you can take 1.5 times final salary as a tax free lump sum which may give you the opportunity to take the value of your fund tax free!!!

Also greater scope for investment strategy ,wider selection of managed funds or if self directed,trackers,structured deposits,etfs etc.

Lastly annual management charge is usually around the 0.75% mark as opposed to 1% in PRSA.

 

[pierboy]

1.5 times is only available at NRA or after 40 years service. So this member might get less than that.

Can you retire out of a PRB if still working in the same employment? I am not sure of this..

 

[Baracuda]

Irish Life has an excellent document comparing the options

[broken link removed]

As far as I can see, if she stays in her current scheme, she will get a tax free lump sum of 3/80ths of her salary for each year of service or 25% whichever is the higher.

With the PRSA, it will 25% of the fund. It is likely that the 3/80ths option will be higher.

Can I clarify this bit?


Does this mean that the company scheme is far more flexible? To access the prsa, you must stop working?

Hi Brendan

Just to clarify a couple of points...

As she is currently in a DB scheme she does not have the option of taking 25% TFLS even if she was to transfer the value to a BOB as per finance act 2011.

However there is a way around this...if she was to transfer the value to a DC scheme she would then have option of 25% TFLS and also have AMRF/ARF rights.

With regard to retiring at age 50 and getting 1.5 times salary...Revenue currently operate a claw back system for people retiring before NRA if using the uplifted scale for TFLS which most people do (this is where a person is not using the normal 3/80 and is looking to maximize their TFLS where they have 20 years service, so it may not be possible to get the max 1.5 salary in most cases where the employee has less than 40 years service.

It should be noted that if a scheme is being wound up and the members are taking a BOB the trustees should lower the NRA to age 60 so as to minimize the claw back on the TFLS.

If a person has a BOB from the same employment and is enrolled in the new scheme and continue's to have unbroken service with this employer they can in fact surrender the BOB and continue to work.