DB pension Transfer Value offer

C

Corkey

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Wife(currently 59) trying to decide on following offer.
Pension promise of 22.3k/yr from age 60.
No dependents pension, index linked to inflation minus 1%. So if inflation is 2%, pension rises 1%.

Transfer value offer is 585k.

Any comments appreciated.
 
A couple of issues to consider:
1. What will be the tax-free lump sum if she retains the DB rights? If she opts for the TV (and transfers into a PRSA say for say 6 months) then she can take 25% as a tax-free lump sum. Maximising the tax-free element is normally advisable (though your combined tax rate on income is also a factor, whether 20% or 40%).
2. Simply comparing the €22.3k income to the €585k TV, it equates to an annuity equivalent of 3.8%. However if you were to buy an Annuity from age 60 with say 2% indexation (for a female) the Annuity rate would be c2.4% (so you would need a TV of c€900,000.
3. if you opt to retain the DB, then you need to consider how secure the Fund is? Is there any risk that the main scheme is underfunded and that the DB might be reduced in the future if the Scheme was wound-up. This assumes the DB income is paid out of the Fund (as opposed to the Scheme buying an Annuity with a Life Office - a more secure option for you wife).
4. if you opt for the TV , take 25% as a tax-free lump sum, and invest the balance into an ARF (ignoring the need to put some of the residual into an AMRF), then you must draw down an income of at least 4% pa, so c€17,500. But if you invest into an ARF, then you have to consider investment risk (a low risk, or medium risk strategy). And depending on the fund performance, the 4% drawdown could result in a gradually reducing income over time.
5. Finally, she should consider the health/longevity risk. If she is in good health, has good family genes, then her average life expectancy at age 60 is c27 years. That would incline one to opt for the DB. If however she is not in good health, not good family genes, then maybe the TV looks more attractive (a bird in the hand etc).
6. Since the DB has no attaching pension paid to a surviving spouse (on her death in retirement), the TV/ARF has the attraction that on her death, any remaining funds are not lost (can form part of estate). However for a female/male combination (and assuming male is say 2 years older), the odds are that the inheritance by a spouse is unlikely.
7. Finally, other assets need to be taken into account. Does she (both of you?) prefer the relative security of a guaranteed income (the DB) or would she prefer the flexibility of the ARF route.

Hope this helps.
 
Thanks for those comments.
She would be due a tax free lump sum of about 50k under DB scheme. So taking the TV would allow for larger tax free sum.
Her health has been an issue recently which has led to the question really.
Also not expecting to be dependent on this pension, so leaning towards taking the Transfer Value, I think.
 
If your wife were to go to a life company and ask for a pension of €22,300, increasing at 1% per annum, it would cost her €855,700. Given that she is 59 now, the transfer value is way off the actual value...as is the case when calculating the transfer values of defined benefit pensions.

One thing that attracts people to the transfer value is the increased lump sum, where she will get €146,250 as a tax free lump sum. She does though give up all guarantees provided under the pension. These are pretty secure these days with the govt coming in if the scheme and employer become insolvent.

The ARF of course, can be transferred to her spouse/ children on death. This is a big thing for retirees, they all think that they'll die too young and the insurance company will make off like bandits. As it's a DB scheme, it's likely that she didn't contribute that much to the scheme in the first place, so it won't take long to make her money back.

The secure money is always your starting point and you have to find justifiable reasons to move away from that. There is no steadfast right or wrong answer, it's what suits your personal circumstances.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
 
Health of the member is coming into focus with more and more DB scheme trustees. It is becoming quite a common occurrence that members who are transferring benefits from DB schemes must provide the trustees with medical certification that they have normal life expectancy before the transfer will be permitted. The logic being, if too many members transfer their benefits from the scheme the scheme has less in reserve for funding. Of course logic implies that it is a good idea for trustees to reduce the liabilities of the scheme but the health of the scheme also has to be protected.

Before you get too far down this route perhaps it would be a good idea to check with the DB administrator as to their full list of transfer requirements. Don‘t ask directly whether or not this medical sign off would be required as you don’t want to go inviting unnecessary hardship on yourself in case this isn’t on the trustees radar at present.
 
Getting the tv withIn 1 year of retirement doesn’t even allow you to grow the funds pre retirement or even get invested really. I guess you could defer
Retirement if you take the tv?

As mentioned above the tv would give a higher lump sum and then reduced annual income of 17.5k. However you have to generate that return so take on the risk. In return you might have an asset to pass on as an inheritance.

have you ascertained how much income you need in retirement?

As Stephen says it’s personal to you so I would put down a few retirement goals and see how you are currently fixed?
 
I've attached a simple mathematical drawdown schedule and, by my reckoning, you would have to live beyond age 91 to be better off in the DB. (as per my assumptions which cannot be guaranteed.) Obviously, this would come with other caveats and you would really need to seek advice but even then, there is no clear cut right or wrong answer without a crystal ball.
It does demonstrate to me though the horrible value offered by current annuity rates. As the scheme Trustees will probably be forced to use these rates, maybe you could use the Annuity Rate argument to see if the Trustees will give you a better transfer value but then go down the ARF route?
 

Attachments

  • Pension drawdown example.pdf
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SBarrett said:
Given that she is 59 now, the transfer value is way off the actual value...as is the case when calculating the transfer values of defined benefit pensions.
Click to expand...

Why is this the case and if transfer values are unfair, what needs to be done / who needs to act to make these values fair?
 
elacsaplau said:
Why is this the case and if transfer values are unfair, what needs to be done / who needs to act to make these values fair?
Click to expand...

The whole methology for calculating the transfer values is pie in the sky. This helps DB pensions appear to satisfy funding levels when the reality is that they don't. The Pensions Authority are the people in charge of pension schemes, so they are the ones to talk to. To get them up to real world values, would require employers to pump huge amounts of money into their DB schemes. Seeing as the majority of the beneficiaries of these schemes are ex employees, I can't see them being very willing to do this.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
 
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