What has happened?
On 22 June 2016, The Minister for Finance, amended long standing retirement rules and extended access to the flexible option of an Approved Retirement Fund or ARF options to all Buy Out Bonds.
What does this mean for you?
- If you are a deferred member of a Defined Benefit Scheme that is wound up, you can now transfer from the scheme into an Approved Retirement Fund
- If you’ve already transferred out of a Defined Benefit Scheme to a Buy Out Bond, you now have both the traditional benefit options and the Approved Retirement Fund options, when you come to take your benefits from the Buy Out Bond.
What are your options?
- You can transfer your deferred / frozen pension into a Buy Out Bond with a Pension Provider.
- If you are over 50, you can cash in your pension early, immediately draw a 25% lump sum tax free (up to €200K) from the Buy Out Bond – and then transfer the residual 75% from your Buy Out Bond into an Approved Retirement Fund and an Approved Minimum Retirement Fund.
What’s an Approved Retirement Fund?
An Approved Retirement Fund and an Approved Minimum Retirement Fund are post retirement investment options that allow you to preserve, manage and control your retirement fund.
You can invest your money into suitable assets and decide how much taxable income you want to withdraw each year, subject to a minimum withdrawal amount, from when you are aged 61 or over. This option allows you to grow your fund during your retirement years.
Or you can use your own investment strategy to invest in a range of different investment funds. You choose the funds depending on the level of risk you are prepared to take with the types of funds. You also benefit from tax free growth on these funds.
Reasons To Transfer
A defined benefit pension scheme used to be regarded as the Rolls Royce journey to a comfortable retirement. But with fund values under pressure from longer lifespans, deficits rising, and the dramatic drop in bond yields post Brexit, they are no longer the stylish vehicles they once were.
Thousands of Irish retirees risk losing the pension promised under their Defined Benefit scheme, if they remain within them.
Deficits in Defined Benefit schemes of the State’s largest private and public sector companies rose by more than 50% during 2014.
Increased Transfer Valuations
The side effect of dramatically lower bond yields has led to some transfer valuations increasing by tens of thousands in a matter of months.
A transfer valuation is the offer made by a pension scheme to swap future income for a cash lump sum. It represents what you would actually get if the scheme were wound up today.
Benefits of Approved Retirement Funds
- The value of your Approved Retirement Fund can be passed to your family, spouse or children after your death. This is not the case with Defined Benefit schemes which are attached to the individual. While a Defined Benefit scheme may have a Spouse pension following the member’s death, there is no lump sum value payable to the estate. The pension effectively dies with the member.
- You no longer have to worry that your pension fund might be depleted before you retire, because you are able to take control of the funds and invest them as you wish.
- You are in full control of your retirement fund, you decide when to draw your funds and at what level of income you need. But don’t worry we can help you with that.
Things to consider:
- What is your current deferred pension entitlement and the current transfer value offered?
- What are your other sources of income in retirement?
- Is your scheme in a large deficit and is it meeting the minimum funding standard?
- Are there any plans to reduce the benefits being offered or are there any plans to wind up the scheme?
The Time To Move Is Now
With transfer valuations hitting record highs, and the recent change in pensions legislation that improves the options for deferred members, now is a great time to review your scheme and consider your options.
Choosing the next home for your retirement funds is a big decision and it is important to review all of your options. We have been advising Irish clients on pension fund decisions like this for many years. In fact, we were one of the first to effect changes of this kind.