Pension arrangements generally allow members to transfer their pension benefits from one arrangement to another. The transfer rules depend on the arrangement you are transferring from and the arrangement you are transferring to.
Types of Pension Benefits that are transferrable:
- Retirement Annuity Contracts (RAC) can be transferred to another RAC or to a PRSA.
- PRSA’s can be transferred to another PRSA or to an occupational pension scheme.
- Occupational pension schemes can be transferred to another occupational scheme, a PRSA or a Personal Retirement Bond (or Buy-out Bond).
The rules and restrictions that apply depend on the circumstances.
Under a Defined Benefit arrangement, individuals receive a retirement income and the option to receive a tax-free lump sum when they reach normal retirement age.
Retirement Income from a Defined Benefit Scheme
Retirement income will be based on your years of pensionable service and a definition of pensionable salary. Defined Benefit Pension Schemes typically pay you a fraction (for example 1/60th) of your pensionable salary (including the state pension) as retirement income for every year of pensionable service, provided you retire at the scheme’s normal retirement age.
For example, suppose an individual has been working for a company for 40 years and has been a member of their Defined Benefit Pension Scheme for all of that time. In the company’s scheme, employees build up an entitlement to a retirement income of 1/60th of their final salary for each year they work there. The employee has reached the scheme’s normal retirement age, which is 66. Because the employee has been working for 40 years, the scheme will aim for him to be provided with a total pension income of two-thirds (40/60ths) of his final salary. Thus, the scheme and the state pension combined will provide them with two-thirds of their final salary as a retirement income.
The actual calculations relating to entitlements from a Defined Benefit Scheme can be complicated, but generally speaking, the longer your service and the higher your salary, the greater your retirement benefit.
Retirement Lump Sums from a Defined Benefit Scheme
Revenue rules state that pension scheme members have the right to a retirement lump sum based on their final salary and years of service. You should note that unless you have made sufficient Additional Voluntary Contributions (AVCs) to your pension, taking a retirement lump sum is likely to reduce the retirement income that your scheme pays to you.
Some schemes aim to provide members with a defined retirement income and a defined lump sum at retirement (such schemes typically provide a retirement income of 1/60th of the final pensionable salary for each year of service plus a lump sum of 3/80ths of final pensionable salary for each year of service). However, the majority of schemes only provide an income benefit but allow members to have the option of converting part of that income into a lump sum.
Transfers from a Defined Benefit Scheme
If you are in a DB scheme, you can choose to remain in the scheme or you can choose to transfer out of it if you wish.
In choosing whether to make the transfer from a Defined Benefit Pension, you should consider the following:
- Is the DB plan fully funded?
- Could the funding position get worse?
- Are you prepared to take on the investment risk if transferring to a DC pension?
- Does the transfer payment properly reflect the cost of the pension you are foregoing?
- Do you place more value on a potentially more secure retirement income or the value of your estate?
- Is there an enhanced transfer payment from the DB scheme to encourage transfers?
- How strong is the employer who sponsored the scheme and will they make contributions over time to make up any funding gap?
- Are there alternatives to the DB scheme that better meets your needs?
Oaktree Financial Services provides advice in all aspects of pension planning, be it the choices available on transfers from DB schemes, setting up a new scheme, or adequately providing an income for retirement. We can advise on a flexible range of pre and post-retirement options, from traditional insurance company schemes to more flexible self-administered options. Feel free to book a complimentary chat with one of our advisors or call us on 025-30588.