Effect on lump sum of retiring early

Bruegel

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My father is now 62 but looking to retire next year. His Normal Retirement Age is 65. He is in a Company Defined Contribution Pension Scheme. The value of the fund at the moment is €210k. At 65 he would be entitled to take up to 1.5 times his salary as a tax free lump sum.

He has been told if he retires at 63, there is a revenue calculation made that reduces the maximum lump sum he can take. He has over 25 years service with this company. Can anybody point me in the direction of the calculation that would be made to get the reduced lump sum maximum?
 
Hi Breugel,
There may be an option to use the Revenue uplifted scale which can permit 1.5 time salary tax free lump sum after 20 years service. The catch is that this has to by the normal retirement age (NRA) of the company pension scheme. Check what the NRA on the scheme is. Its always worth checking the amount of tax free lump sum available under both options i.e option a) up to 1.5 times salary and the balance used to purchase an annuity or option b) 25% of the fund tax free and the balance into an Approved Retirement Fund (ARF/AMRF). If option b is better then the issue falls away.
Regards Vincent
 
Thank you to North Star.

His salary is slightly over 60k so option a would be the preferred. The scheme NRA is 65.
 
If your father has completed more than 20 years service, the maximum lump sum he can take is 1.5 times his final remuneration (less any retained lump sum benefits) multiplied by the ratio of completed service to potential service to normal retirement age. Based on a salary of €60k and completed service of 25 years out of 27, his maximum lump sum would be (assuming no retained lump sum benefits from previous employment) €60,000 x 1.5 x 25/27 = €83,333.

This would be somewhat more than 25% of his total fund. However, if he takes this option, he will be obliged to use the balance of his fund (other than the amount secured by any AVCs he has paid) to purchase an annuity, which may not be the optimal choice based on current market conditions.
 
Thanks Homer, that's very helpful.

In terms of building a model, he has two options:

Option 1 - take 1.5 x Salary (x actual service/potential service) - say €83k, buy an annuity - seems to be approx. €6k per annum. When he dies (assuming after guaranteed period), no more money.

Option 2 - Less sure on how to model this. Take 25% of fund - say €53k if fund stays same value (€210k). Then take at least 4% of the remainder per year. At any point can buy an annuity with the remaining pot.

How much are fees on a ARF/AMRF? Are there broad sample rates on annuity rates based on age to run some models?

Potentially stupid question - I assume annuities are linked to interest rates and the thought is that they will rise over time leading to better annuities in the medium future?
 
How much are fees on a ARF/AMRF? Are there broad sample rates on annuity rates based on age to run some models?

Potentially stupid question - I assume annuities are linked to interest rates and the thought is that they will rise over time leading to better annuities in the medium future?

The ARF fees very much vary on the contract structure in place. You can pay anywhere from 0.4% to 1% plus advisor fees.

The annuity rates vary dependent on age, spouse's pension, how much the spouse's pension is, indexation. Hard to give a rule of thumb when there are so many variables.

The rate you get when you purchase the annuity is the one you are stuck with, even if rates increase in the future.

Steven
www.bluewaterfp.ie
 
Bruegel, your analysis of the options available to your father is pretty much spot on. However, the pension will not automatically die with your father as he would have the option of providing for the pension to continue to his spouse or other adult dependant.

Regarding whether immediate annuity rates will increase in the future, yields on long dated eurozone government bonds are currently at or near record lows and the expectation is that these will rise at some point in the future. But there is no guarantee that this will happen and the other driver of annuity rates, changes in life expectancy, will also impact on future annuity rates.

Irish Life have a website that shows their current standard immediate annuity rates. You can access it at https://www.pensionplanetinteractive.ie/ppi/public/loadPensionChoice.action

This will allow you to see what current rates are at different ages and with different options - level or increasing, with and without a guaranteed period, with and without a spouse's pension. As Stephen says, the rates will be locked in at the time your father decides to purchase the annuity.
 
Just wanted to give a belated thanks to Homer, North Star and SBarrett - it was most helpful for me.
 
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