Retirement options under the GMS pension scheme

A friend of mine who is about to retire has asked me about his retirement options under this scheme. The letter from Mercer is not very helpful at all. I can't get my head around it.

This is my understanding of the scheme and I would appreciate if anyone can correct it.

The main scheme
(He has AVCs, but they are very small so I don't want to confuse the issue)
1) It is a defined contribution scheme.
2) It is an Occupational Pension Scheme
3) He can take 25% of the fund tax-free.

5) He must buy an annuity with the remaining 75%
6) The annuity he is being offered is designed, but not guaranteed to increase in line with the cost of living.



Question
Mercers gives him an option to forgo the tax-free lump sum and buy an annuity with it. How could this be a good idea? To use tax-free money to buy an annuity which is taxable?

The only way it could make sense is if the annuity rate was so brilliant that it compensated for the 41% tax take. If it is so brilliant, how can it be so?

Brendan said:

Question B)
Mercers gives him an option to forgo the tax-free lump sum and buy an annuity with it. How could this be a good idea? To use tax-free money to buy an annuity which is taxable?

The only way it could make sense is if the annuity rate was so brilliant that it compensated for the 41% tax take. If it is so brilliant, how can it be so?

Click to expand...

There are many people for whom this might be an option worth considering. Take the case of a retiree who, based on family history and general health, expects to live a long retirement but who has no interest in passing on capital on his/her death. Such a person will not want to run down capital in his/her lifetime but will want to maximize income. He/she would need to invest any (tax free) lump sum and would end up paying tax on the returns. So there will be tax paid on the money to be spent if the original lump sum is not run down. An annuity is a convenient investment vehicle in these circumstances. While it may not be the most appropriate, it is a logical option.

Hi Oysterman

I still don't get it. The Annuity Provider is going to buy some form of bond to provide the income.

The rate quoted by Mercers is 6.6% which amounts to 4% after tax. It is "designed (but not guaranteed) to increase in line with the cost of living"

What is the yield on Government Bonds at the moment? Couldn't he just buy a bond fund and pay lower tax on it, and retain the capital sum?

I could see some sense in your argument, if he was buying an annuity, but not a pension annuity, where a substantial portion of the income was tax free.

Brendan

I agree with you. My view wasn't based on the annuity in question - I didn't have the 6.6%/4% figures you quote. On those numbers, the retiree who doesn't want to deplete capital would appear to do far better from a bog-standard annuity or judicious purchasing of gilts (or a fund to do same).

My point was simply that income is now the number one priority for many people retiring - yet capital is what many pension schemes are providing in spades. How many retirees in recent years maximised their tax-free lump sum and invested it in one way bets like, eh, the Irish clearing banks or that business miracle of a bank we're now proud to collectively own? They'd have been better off with a vehicle to, risk free, convert their capital into a reliable (even if undramatic) income stream.

Capital was fine back in the days where retirees could reasonably be expected to die within a couple of years. Income is king with increasing longevity.

I got the Annual Report from Mercers and this is truly a unique pension scheme.

It is a defined contribution fund.

On retirement, the fund offers the annuity itself. It does not buy it from an annuity provider.

So the fund has a liability to its retired members to pay them a pension for the rest of their life. The value of the assets has declined over the past year, but the liabilities will not have declined.

So I presume that this fund has a serious deficit, but there is no external employer to fund it as there is with most schemes.

As with all occupational pension schemes, those who have retired get first priority on the assets. As there are only 300 retired members compared to 3000 active members, those who are retiring are very safe.

The risk would be if the government changed the law to share the deficit equally between retired members and active members.

Brendan

That is a shocking scheme. Your friend is probably okay, given that he's about to retire. He should, however, point out the issue to his younger colleagues (after he's got his money out safely...) and they should go to the Ombudsman, or whatever course is appropriate.

I am about to collect my GMS pension from Mercer and am finding it difficult to work out my options. I have checked with Irish Life re buying the annuity from them, using the 75% remaining after taking my lump sum.
A few points of interest. Irish Life charge a 2% comission for setting up the annuity! Mercer do not charge anything. Plus point!
Irish Life offer the option(at a price) of a 10 year guarantee that my pension will be paid to my estate in the event of my death in the next 10 years. Mercer will only offer a 5 year guarantee on this. Minus point!
Irish Life tells me my pension will be 'index linked' if I buy it from them. Mercer does not, (as already stated in this forum), guarantee any increase with inflation.
The Irish Life rep states that Mercer most likely use companies such as Irish Life etc, to invest my 75% in any event. Does anyone know if this is true?
Query: If the 25% lump sum is put into a current account in the bank, where it will not gain (barely) any interest in this economy, does one have to pay tax on it, or is it just if it makes a reasonable interest return.
What other companies will quote on annuities purchase?
Why is it all so unclear?????

You may need independent advice on this truly unique scheme. I suggest that you may need advice, independent of Mercers, especially if you don't understand what they are telling you.

I suspect that the GMS scheme might be the best one for you, but it depends on the scheme deficit position. I have not seen the most recent accounts.

There are only two competitive suplliers in the market - Irish Life and New Ireland. You should not go direct. Use a discount broker such as www.ferga.com to set it up. They will get a higher annuity rate as they will take a lower commission.

You can get 3% interest on your deposit at present. Given the prices are falling by around 5%, that is a real rate of interest of around 8%. This is probably the highest real rate of interest ever in Ireland. The 3% will be taxed at DIRT rates. (Obviously if you put it in a current account which pays no interest, you will pay no DIRT!)

Mardaid, as regards Irish Life commissions (2%) on annuity setup, and Mercers none - worth checking what the respective allocation rates are, as this might be where Mercers make up for charging no commission? ie commission / higher allocation rate v's no commission / lower allocation rate : same difference!! I agree!! clarity is such a scarce commodity, and there is no good reason for it to be so!

I see that the trustees of the GMS pension scheme have recently changed the rules of the scheme so that the Approved Retirement Fund (ARF) options are now available in respect of a member's funds in the GMS scheme.

While the ARF option may or may not suit all members of the scheme, it's something that should be evaluated before a retirement decision is made.

Liam D. Ferguson