Deferred pension - option to take transfer value

Baby boomer

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Hi all,

I'm currently aged 57 and I have a deferred pension from a previous employment that is due to kick in at age 60. The annual pension will be about 15,000 and I have been quoted a transfer value of roughly 300,000 by the scheme administrator.

When the pension arrives I would expect to be paying tax at the higher rate for a few years at least. It seems to make sense to me to take this transfer value and put it into a PRSA or buy out bond. I understand that I could take 25% of the transfer value (€75,000) as an immediate tax free lump sum and draw down the rest as and when suits. (I have other income that will be above the AMRF level.)

Am I correct in my understanding and, if so, what's the best way of going about it?
Any advice would be appreciated.
 

MichaelT

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10
They are absolutely taking the proverbial with that valuation, all things being equal in terms of solvency / security of scheme.

I'm not an actuary but that doesn't look like it tallies with actuarial valuations. Most DBs are buying members out with ETVs.
 

Baby boomer

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Michael T,

Thanks for your reply. A few people have said that to me alright. However, this particular fund has been "de-risked" and is solvent but it is likely to only pay out a flat benefit with no pension increases. I don't believe an ETV is on the cards, unfortunately. So I think I'd actually do better investing the transfer value and drawing it down as necessary.
Anyway, if the option to take an immediate 25% tax free is available, this would swing it for me.

(As a matter of interest, what do you think a fair transfer value would be? The scheme administrator is saying it's done in accordance with statutory guidelines and they don't have discretion.)
 
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Marc

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1,000
Your transfer value will increase by around 10%pa each year to retirement.

If you take the transfer now, how are you going to guarantee that return?

You should be entitled to exchange some of the pension as tax free cash in the main scheme. Typically you will receive 3/80ths of your final salary as a lump sum for each year of service up to a max of 1.5 times salary at age 60 and a smaller pension, check the scheme booklet.

You can always take the transfer just before age 60 if it’s appropriate to do so but your default decision should always be to stay in the scheme.
 
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Conan

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895
A couple of points:
- True the TV does not represent the “annuity value” of the deferred pension. But for a single life, non- indexed Annuity, it’s not miles off.
- you need to work out what you overall retirement lump sum will be (up to €200,000 tax free) between the deferred pension and any current occupational pension. I would look at what will give the higher tax-free amount (taking 3/80ths x n under the deferred OR 25% if in a PRSA) when combined with any lump sum under any current scheme. Tax-free money is generally better than taxable income.
- you also need to consider state of health. If your family history is one of longevity, then the Annuity may seem more attractive ( it is a guaranteed income for as long as you live). But if health is poor, then the TV into a PRSA may be more attractive (as any funds remaining in your ARF on death is effectively an inheritance).
- yes, one should always be reluctant to give up a guaranteed income (assuming continued solvency), but there can be circumstances where the TV (even if not fully equal to the Annuity value) might be a better and more flexible option.

Try to work out the pluses and minuses.
 

Baby boomer

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Marc & Conan,

Thank you for your replies, that's very useful. Just to be clear, there's no lump sum attached to this deferred pension. It's a straightforward annual pension of €15k, no lump sum and no option under the scheme rules to convert any part of the pension to a lump sum. So it will all be taxed.
Also it dies with me. If I take the transfer value, whatever is left will form part of the estate and will pass to my beneficiaries. So it seems than unless I'm really being disadvantaged by the calculation of transfer value, the plusses outweigh the minuses?

Or am I missing something?
 

SBarrett

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3,003
There will be a tax free lump sum option as well but the €15,000 will be reduced accordingly. They just haven't provided it to you.

You have to decided whether to want to have cash now, more flexibility in how much you can take out of the policy but assume all the risk and costs. Or a guaranteed €15,000 for the rest of your life, paid like a salary with no worries about cost or how the markets perform. There is a trade off for the flexibility i.e. you might run out of money or get less than €15,000 a year.

As for whether the €300,000 is good value, is there a spouse's pension attached to it? If so, what percentage of the €15,000?


Steven
www.bluewaterfp.ie
 

Baby boomer

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Hi Steven,​

Thanks for your reply, it's appreciated. A few thoughts:

1. I hadn't really brought the spouses pension into my thinking. It's 50% so 7.5k but if I took the transfer, she would inherit the fund anyway, so that kinda cancels out? Or should the transfer value be increased to reflect it? She has a good pension in her own right anyway.

2. I don't have a problem accepting the increased risk. I have another very solid blue chip pension apart from this that will pay cpi increases, has provision for spouses pension and is not in deficit so i would be ok with Increased investment risk on this one.

3. I've asked about a tax free lump sum option in lieu of part of the 15k pa, and the scheme admin is most insistent it doesn't exist. Apparently, I signed away my entitlement to this 17 years ago when I took a redundancy package from the employer and it was reflected in the enhanced redundancy package I received. I vaguely remember this might well be the case!

4. I would be keen to access a tax free lump sum right now if this were possible.
 

Conan

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Ok so to update:
- if the €15,000 includes a Widows Pension of 50% then the TV looks less attractive. But....
- if you took an enhanced redundancy package and waived your right to a lump sum from this scheme, then the attraction of transferring into a PRSA is increased since you could take 25% as a lump sum on drawdown. But when combined with your current scheme you need to figure out if the total lump sum will exceed €200k. If not then it’s all tax-free. If yes, then any excess over €200k is taxable at 20%?
- as a general rule it is advisable to maximize the retirement lump sum, particularly if tax-free.
- if your current scheme is “very solid” then accepting the TV may offer greater flexibility, so long as the current scheme provides a sufficient guaranteed income (even better if adding in your wife’s pension).

Best of luck.
 

SBarrett

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3,003
3. I've asked about a tax free lump sum option in lieu of part of the 15k pa, and the scheme admin is most insistent it doesn't exist. Apparently, I signed away my entitlement to this 17 years ago when I took a redundancy package from the employer and it was reflected in the enhanced redundancy package I received. I vaguely remember this might well be the case!​

4. I would be keen to access a tax free lump sum right now if this were possible.
We're in a totally different ball game now. Transferring to a PRSA is your only option if you want to access a tax free lump sum. If you have more that 15 years service in that company, a transfer to a PRSA is closed.

If you have less than 15 years service, you can transfer to a PRSA. But you must get a Certificate of Benefit Comparison carried out by an actuary to do a comparison between the benefits you are getting and what you are giving up. That's costs €1,000 plus VAT.

You also need a letter stating the reasons why transferring out of the defined benefit scheme into a PRSA is in your best interests. There is a lot more work to be carried out on this than advice than can be given on an internet forum. A complete picture of your life, income and outgoings has to be assessed.



Steven
www.bluewaterfp.ie
 

Baby boomer

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Yes, I do have more than 15 years service in that scheme. Is it possible to get around this and transfer to a buyout bond and hence to PRSA?
 

MeathCommute

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I always assume a life expectancy of 30 years after retirement, being optimistic, so would say that your TV value should be 450k. I was offered 700k as an enhanced transfer value out of my defined benefit, which stands at 30k a year from 60. My accountant said the offer should have been north of 900k, so I told them to shove it
 

Baby boomer

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That's an interesting way to look at it, MeathCommute. I'm finding it very hard to get my head around what's a "fair" transfer value. On the one hand, everybody is saying that, actuarily speaking, 300k is on the low side for a 15k pension.
On the other hand, I think a capital sum of 300k would easily generate an income stream of 15k pa with the capital left intact for either the next generation or for nursing costs in extreme old age or whatever. For instance, I could buy an apartment half a mile away from me for about 260 - 270 k that is currently yielding 1800 per month. On the most conservative estimate, allowing for management charges, insurance, repairs and if necessary, agent fees, that easily beats 15k AND the capital remains intact. As it stands, rents look stable in the medium term whereas the 15k pension is almost certainly fixed and could easily be eroded by inflation.

Am I missing something here?
 

Marc

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1,000
I’d say you are missing a detailed analysis of the current scheme

You say the 15k pa is “almost certainly” fixed.

You shouldn’t make any decisions unless you have a full and detailed analysis of the current scheme.
 
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Baby boomer

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Hi Marc,
I take your point. Not sure how I'd go about a full and detailed analysis of the current scheme but I did go for a pint with a former colleague who is a trustee. He's a sound, shrewd guy and knows a hell of a lot more than I do. Basically, pension increases are optional at trustee discretion if funds are available. But he says the scheme was in trouble with its funding standard and a rescue plan was put in place. This involved increased contributions from employer and employees but the plan was designed to meet the basic pension liability but NOT discretionary increases. A DC scheme was opened for future service. The current fund was moved from equity to low risk bonds that will meet the liabilities but no more than that. He said that the possibility of increases for pensions in payment was "snowballs chance in hell" territory even though, officially, that's not going to be said.
 

MeathCommute

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190
The elephant in the room is super inflation versus a set pension payout. If the government ever go the route of Sean A Lemass, you could have huge wage increases versus a static deferred pension, that is going down in value. Hopefully it won't come to that. The EU don't want super inflation
 
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Conan

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Average life expectancy for a male retiring at 65 is now just under 20 years. So even in a fully funded scheme (and going at 60), no Trustees will offer a multiple of 30:1.
Allowing for the fact that the the Annuity dies with you, a multiplier of 20:1 plus a little, is no wholly unreasonable. You can either accept of reject it.
As for future indexation, well that’s a great uncertainty.
 

Baby boomer

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Conan,
I'm inclined to agree on the multiplier. Anything over 20 looks good to me. Especially if taking the transfer makes 25% of the pot tax free.

MeathCommute,
Accelerated inflation is exactly what I'm worried about. Even 2.5% inflation per annum would knock 50% off the worth of the pension after 20 years. And it could be worse. Ok, it shouldn't be, but who knows? While the pension itself may be guaranteed, its value (ie purchasing power) isn't.

Thanks for your replies, the advice is appreciated.
 

SBarrett

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Yes, I do have more than 15 years service in that scheme. Is it possible to get around this and transfer to a buyout bond and hence to PRSA?
You can't transfer to a PRSA then. You can transfer to a buy out bond but can't transfer to a PRSA from that. The rules don't allow it. The tax free lump sum is off the table with regards to this pension.


Transfer values of pensions are based on agreed with but generous and somewhat unrealistic assumptions which drive down the value of the pension. To be looking for the scheme to pay you the exact cost of replicating the pension through a life company is completely unrealistic and you shouldn't be expecting it.


Steven
www.bluewaterfp.ie
 
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