Case study Should you always take a defined benefit pension

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Marc

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Navigating Defined Benefit Schemes​


Introduction


Navigating the world of pensions can be complex, especially when it comes to defined benefit schemes.

In this case the client is in excess of the SFT of €2m and was standing to lose around 50k in additional tax. We charged our fees on the gross pension value before the benefit crystalised effectively giving the client 71% tax relief on our fees. We then arranged for the lump sum to be paid (around 300k more than under the main scheme) and rebated all commission on the annuity giving additional pension payments for life and higher spouse's pension in the event of death than under the main scheme.

The Client’s Scenario​

Recently, a client, who’s turning 60 this year, approached us. She’s part of a defined benefit scheme with a large company. Her primary concern was whether to accept the benefits proposed by the scheme. As financial advisors, our general stance is to recommend staying within the primary scheme unless there’s a specific advantage tailored to the client’s situation. For instance, someone with severe health concerns might prioritize securing their pension’s value for their family.

The offer on the table for our client was a €65,000 per annum pension, guaranteed for five years, a 50% spouse’s pension, and a lump sum of €174,000. Critically, the main scheme is not indexed. Discretionary increases are theoretically possible but haven’t been paid in decades.

When considering the lifetime allowance, the pension’s estimated value, inclusive of AVCs, stands at €2.2 million. This means there’s a tax implication since it surpasses the €2 million lifetime allowance. Consequently, our client halted her AVC contributions, leaving her with an AVC fund of €720,000. The cash equivalent of her defined benefit scheme is approximately €1.2 million, bringing the total estimated cash value to about €1.92 million when including the AVCs.

Our Analysis and Recommendations​

After thorough evaluation, here’s what we suggested:
  1. Opt for Cash Equivalent Transfer Value: We advised her to consider the Cash Equivalent transfer value (around €1.2 million) and combine it with her existing AVC fund of €720,000. This can then be moved into a Personal Retirement Savings Account (PRSA) with a certificate of benefit comparison or a buyout bond.
  2. Lump Sum Benefits: Under Revenue rules, she can claim a maximum lump sum of 25% of the fund value (up to €500,000). This contrasts with the defined benefit scheme’s maximum of €174,000. From this €500,000, the initial €200,000 is tax-exempt, while the subsequent €300,000 incurs a 20% tax. This means she could potentially receive a net payment of €440,000.
  3. Vested PRSA Benefits: The remaining pension fund, approximately €1.5 million, could be placed in a vested PRSA. This is akin to an Approved Retirement Fund (ARF). However, given our client’s risk tolerance and personal circumstances, we suggested purchasing an annuity with the entire pension fund.
  4. Annuity Insights: Currently, a joint life annuity on a nil commission basis offers a rate of 4.8%. This provides a guaranteed lifetime income of €72,000 per annum, an increase of about €7,000 annually compared to the main scheme’s offer.
  5. Delaying Annuity Purchase: If she chooses to postpone the annuity purchase, the vested PRSA would function similarly to an ARF. She’d need to draw an annual income of 4% until age 71, after which it would increase to 5%. The initial income would be at least €60,000 per annum.
  6. Additional AVC Contributions: By following our recommended strategy, she could potentially make an AVC contribution of €84,333 for last year and this year. This would attract a 40% income tax relief, bringing her total pension fund value close to €2 million upon retirement.

Conclusion​

Every individual’s financial situation is unique, and there’s no one-size-fits-all solution. This case study underscores the importance of personalised financial planning. It’s crucial to move beyond generic advice and consider the specific circumstances at hand. Making informed retirement decisions can significantly impact one’s future, and it’s always best to seek expert guidance.
 
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Marc said:

Navigating Defined Benefit Schemes​


Introduction


Navigating the world of pensions can be complex, especially when it comes to defined benefit schemes.

In this case the client is in excess of the SFT of €2m and was standing to lose around 50k in additional tax. We charged our fees on the gross pension value before the benefit crystalised effectively giving the client 71% tax relief on our fees. We then arranged for the lump sum to be paid (around 300k more than under the main scheme) and rebated all commission on the annuity giving additional pension payments for life and higher spouse's pension in the event of death than under the main scheme.

The Client’s Scenario​

Recently, a client, who’s turning 60 this year, approached us. She’s part of a defined benefit scheme with a large company. Her primary concern was whether to accept the benefits proposed by the scheme. As financial advisors, our general stance is to recommend staying within the primary scheme unless there’s a specific advantage tailored to the client’s situation. For instance, someone with severe health concerns might prioritize securing their pension’s value for their family.

The offer on the table for our client was a €65,000 per annum pension, guaranteed for five years, a 50% spouse’s pension, and a lump sum of €174,000. Critically, the main scheme is not indexed. Discretionary increases are theoretically possible but haven’t been paid in decades.

When considering the lifetime allowance, the pension’s estimated value, inclusive of AVCs, stands at €2.2 million. This means there’s a tax implication since it surpasses the €2 million lifetime allowance. Consequently, our client halted her AVC contributions, leaving her with an AVC fund of €720,000. The cash equivalent of her defined benefit scheme is approximately €1.2 million, bringing the total estimated cash value to about €1.92 million when including the AVCs.

Our Analysis and Recommendations​

After thorough evaluation, here’s what we suggested:
  1. Opt for Cash Equivalent Transfer Value: We advised her to consider the Cash Equivalent transfer value (around €1.2 million) and combine it with her existing AVC fund of €720,000. This can then be moved into a Personal Retirement Savings Account (PRSA) with a certificate of benefit comparison or a buyout bond.
  2. Lump Sum Benefits: Under Revenue rules, she can claim a maximum lump sum of 25% of the fund value (up to €500,000). This contrasts with the defined benefit scheme’s maximum of €174,000. From this €500,000, the initial €200,000 is tax-exempt, while the subsequent €300,000 incurs a 20% tax. This means she could potentially receive a net payment of €440,000.
  3. Vested PRSA Benefits: The remaining pension fund, approximately €1.5 million, could be placed in a vested PRSA. This is akin to an Approved Retirement Fund (ARF). However, given our client’s risk tolerance and personal circumstances, we suggested purchasing an annuity with the entire pension fund.
  4. Annuity Insights: Currently, a joint life annuity on a nil commission basis offers a rate of 4.8%. This provides a guaranteed lifetime income of €72,000 per annum, an increase of about €7,000 annually compared to the main scheme’s offer.
  5. Delaying Annuity Purchase: If she chooses to postpone the annuity purchase, the vested PRSA would function similarly to an ARF. She’d need to draw an annual income of 4% until age 71, after which it would increase to 5%. The initial income would be at least €60,000 per annum.
  6. Additional AVC Contributions: By following our recommended strategy, she could potentially make an AVC contribution of €84,333 for last year and this year. This would attract a 40% income tax relief, bringing her total pension fund value close to €2 million upon retirement.

Conclusion​

Every individual’s financial situation is unique, and there’s no one-size-fits-all solution. This case study underscores the importance of personalised financial planning. It’s crucial to move beyond generic advice and consider the specific circumstances at hand. Making informed retirement decisions can significantly impact one’s future, and it’s always best to seek expert guidance.
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Thanks for sharing Marc. These case studies are always interesting. Quite often it's possible for a reader to takeaway a point or two....which I'd say is one reason why a lot of people use this forum.

If it's correct to say that "it's always best to seek expert guidance" then including the cost of your service to this particular client would be also be pertinent and useful to know.
 
Marc said:

Navigating Defined Benefit Schemes​


Introduction


Navigating the world of pensions can be complex, especially when it comes to defined benefit schemes.

In this case the client is in excess of the SFT of €2m and was standing to lose around 50k in additional tax. We charged our fees on the gross pension value before the benefit crystalised effectively giving the client 71% tax relief on our fees. We then arranged for the lump sum to be paid (around 300k more than under the main scheme) and rebated all commission on the annuity giving additional pension payments for life and higher spouse's pension in the event of death than under the main scheme.

The Client’s Scenario​

Recently, a client, who’s turning 60 this year, approached us. She’s part of a defined benefit scheme with a large company. Her primary concern was whether to accept the benefits proposed by the scheme. As financial advisors, our general stance is to recommend staying within the primary scheme unless there’s a specific advantage tailored to the client’s situation. For instance, someone with severe health concerns might prioritize securing their pension’s value for their family.

The offer on the table for our client was a €65,000 per annum pension, guaranteed for five years, a 50% spouse’s pension, and a lump sum of €174,000. Critically, the main scheme is not indexed. Discretionary increases are theoretically possible but haven’t been paid in decades.

When considering the lifetime allowance, the pension’s estimated value, inclusive of AVCs, stands at €2.2 million. This means there’s a tax implication since it surpasses the €2 million lifetime allowance. Consequently, our client halted her AVC contributions, leaving her with an AVC fund of €720,000. The cash equivalent of her defined benefit scheme is approximately €1.2 million, bringing the total estimated cash value to about €1.92 million when including the AVCs.

Our Analysis and Recommendations​

After thorough evaluation, here’s what we suggested:
  1. Opt for Cash Equivalent Transfer Value: We advised her to consider the Cash Equivalent transfer value (around €1.2 million) and combine it with her existing AVC fund of €720,000. This can then be moved into a Personal Retirement Savings Account (PRSA) with a certificate of benefit comparison or a buyout bond.
  2. Lump Sum Benefits: Under Revenue rules, she can claim a maximum lump sum of 25% of the fund value (up to €500,000). This contrasts with the defined benefit scheme’s maximum of €174,000. From this €500,000, the initial €200,000 is tax-exempt, while the subsequent €300,000 incurs a 20% tax. This means she could potentially receive a net payment of €440,000.
  3. Vested PRSA Benefits: The remaining pension fund, approximately €1.5 million, could be placed in a vested PRSA. This is akin to an Approved Retirement Fund (ARF). However, given our client’s risk tolerance and personal circumstances, we suggested purchasing an annuity with the entire pension fund.
  4. Annuity Insights: Currently, a joint life annuity on a nil commission basis offers a rate of 4.8%. This provides a guaranteed lifetime income of €72,000 per annum, an increase of about €7,000 annually compared to the main scheme’s offer.
  5. Delaying Annuity Purchase: If she chooses to postpone the annuity purchase, the vested PRSA would function similarly to an ARF. She’d need to draw an annual income of 4% until age 71, after which it would increase to 5%. The initial income would be at least €60,000 per annum.
  6. Additional AVC Contributions: By following our recommended strategy, she could potentially make an AVC contribution of €84,333 for last year and this year. This would attract a 40% income tax relief, bringing her total pension fund value close to €2 million upon retirement.

Conclusion​

Every individual’s financial situation is unique, and there’s no one-size-fits-all solution. This case study underscores the importance of personalised financial planning. It’s crucial to move beyond generic advice and consider the specific circumstances at hand. Making informed retirement decisions can significantly impact one’s future, and it’s always best to seek expert guidance.
Click to expand...

I'd like to analyse this case study in detail. I think there are alternate, possible better ways to look at this. I think that highlighting all the options will be very useful for folk in similar circumstances. Before commenting, I need some more info, as follows:

A. Just to clarify, are the options in respect of the DB plan:
1. Stay in the scheme and receive a pension of €65k p.a. and a lump sum, in addition to the pension, of €174k; or
2. Receive a TV in respect of the above of €1.2m
My understanding is that the AVC fund is in addition to the above.

B. Other info
1. Is she actually retired or planning to retire?
2. If still active, what's the retirement age of the plan?
3. Can she remain in the plan until she actually retires?
4. What is the employee contribution rate to the plan?
5. How many years service in the company does she have to date?
6. What is her total remuneration for income and service related TFLS calcs?
 
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