Cashing buyout bond

[Crow Paddy]

Hello,

I wonder can someone answer this query. I have an occupational pension with my current employer and have no plans to retire, but I also have a buyout bond from a previous employer. I could use some extra cash at this time and as I am aged early fifties, I wonder what are the options regarding cashing the buyout bond. Is some of it available as a lump sum, and if so what happens to the rest? Could it be added as an AVC to my current pension?

Thanks,
Paddy.

 

[Steven Barrett]

Hi Paddy,

You have two choices:

Option 1
Take 25% tax free (assuming fund is under €800,000)
With the remainder, €63,500 is put into an AMRF until you are 75. You can only draw down 4% of this during that time. The remainder is put in an ARF which you can draw an income in...or you may cash the lot in and pay income tax on it.

Option 2
Take a tax free lump sum based as a percentage of your final salary. This is calculated on years service but there is a deduction for cashing in early.
The remainder is used to purchase an annuity. You give them your money and they guarantee to pay you a certain amount for the rest of your life.

You cannot put it in your AVC's.


Steven
www.bluewaterfp.ie

 

[North Star]

Hi Crow Paddy,

As you are over 50 you should be able to retire your Buy Out Bond i.e take the 25% of the fund tax free and transfer the balance into an AMRF/ARF. You dont have to draw down the 4% annual income from the ARF till age 60 but you can if you wish. You could transfer the whole of your Buyout Bond into your current occupational pension but that wouldn't solve your need for extra cash now.

I hope this helps. All the best Vincent

 

[Dan Murray]

My understanding is that the 25% lump sum and AMRF/ARF option is only available if your Buy Out Bond (BOB) relates to a DC plan, i.e. this option is not available if the BOB was set up following a transfer value from a DB plan.

Even if the BOB is was set up as a result of a TV from a DC plan, I remember reading somewhere that the Rules of the BOB (or the original DC plan) needed to provide for the 25% lump sum/ARF option, etc.

Perhaps someone can clarify please?

 

[Crow Paddy]

Thanks for the replies. The BOB came from a DB plan actually now that I think about it. That plan has been wound-up (which was the reason for the BOBs). So, I am interested to find out if there might be restrictions. I'd be surprised if there were, but you never know with pensions.

 

[Steven Barrett]

Dan is correct. If the proceeds came from a DB scheme, the 25% lump sum & ARF option is not available, so if you cashed it in early you are restricted to the annuity option.

As Vincent said, you can transfer the BOB to your current DC scheme and avail of the ARF.


Steven
www.bluewaterfp.ie

 

[Dan Murray]

......I'd be surprised if there were, but you never know with pensions.

Hi Crow Paddy - brilliant comment!

Who has responsibility for pensions in Ireland? The Revenue, The Pensions Regulator, The Department of Social Welfare (whatever it calls itself these days!).

It just is a farce - so your PRB is now DC in nature but because of one's personal history, its DC nature is different to a pure bred DC PRB (i.e. where the transfer payment into the bond came from a DC plan), and different rules apply. Some form of ethic cleansing within PRBs, perhaps?! And the rationale?

This is all very idiotic and dysfunctional. You will note that the original two responses to your query came from industry professionals and even both of them missed this point. Even they (and I'm not blaming them) seem to struggle with what should be a really simple question. Interesting also that I still don't know the answer to these aspect - and I've actually tried to find out this minutiae this morning....

Even if the BOB is was set up as a result of a TV from a DC plan, I remember reading somewhere that the Rules of the BOB (or the original DC plan) needed (to be amended) to provide for the 25% lump sum/ARF option, etc.

As Vincent said, you can transfer the BOB to your current DC scheme and avail of the ARF

For the avoidance of doubt, this does not help your current position because benefits under a single plan must normally (yes, of course, there are exceptions! STOP, STOP - I CAN'T TAKE NO MORE) be taken at the same time. [Another farce which militates against, for example, some form of phased retirement].

There are just so many aspects of ridiculous rules relating to Irish pensions. But where multiple parties are responsible (as per above) - no one is responsible. It's the oldest trick in the book. Remember the banking inquiry. The Government members said they were very sorry but really it was the fault of the regulators and the banks; the bankers came in, said their apologies and said it was the fault of the regulators and the government, the regulators came in - offered their heartfelt apologies but reminded us that all would have been well where it not for the banks and the developers......and so it goes.

It's the firing squad concept - give all the soldiers a gun but have only one live bullet - all are responsible but no one really is responsible. Or again, remember Kissinger's great line.......if you want to ring Europe, who do you call?

Because - as long as we have no one to call - the farce will continue. And continue it will - that's just the way things are done in these parts!!

 

[Steven Barrett]

Hi Crow Paddy - brilliant comment!

Who has responsibility for pensions in Ireland? The Revenue, The Pensions Regulator, The Department of Social Welfare (whatever it calls itself these days!).

It just is a farce - so your PRB is now DC in nature but because of one's personal history, its DC nature is different to a pure bred DC PRB (i.e. where the transfer payment into the bond came from a DC plan), and different rules apply. Some form of ethic cleansing within PRBs, perhaps?! And the rationale?

This is all very idiotic and dysfunctional. You will note that the original two responses to your query came from industry professionals and even both of them missed this point. Even they (and I'm not blaming them) seem to struggle with what should be a really simple question. Interesting also that I still don't know the answer to these aspect - and I've actually tried to find out this minutiae this morning....

For the avoidance of doubt, this does not help your current position because benefits under a single plan must normally (yes, of course, there are exceptions! STOP, STOP - I CAN'T TAKE NO MORE) be taken at the same time. [Another farce which militates against, for example, some form of phased retirement].

There are just so many aspects of ridiculous rules relating to Irish pensions. But where multiple parties are responsible (as per above) - no one is responsible. It's the oldest trick in the book. Remember the banking inquiry. The Government members said they were very sorry but really it was the fault of the regulators and the banks; the bankers came in, said their apologies and said it was the fault of the regulators and the government, the regulators came in - offered their heartfelt apologies but reminded us that all would have been well where it not for the banks and the developers......and so it goes.

It's the firing squad concept - give all the soldiers a gun but have only one live bullet - all are responsible but no one really is responsible. Or again, remember Kissinger's great line.......if you want to ring Europe, who do you call?

Because - as long as we have no one to call - the farce will continue. And continue it will - that's just the way things are done in these parts!!

The second highlighted part is why the DB BOB restrictions wasn't mentioned in my first post. Pensions are overly complicated, so when an answering a problem to which you don't have all the facts, you go with the simplest answer (which isn't that simple either with the AMRF requirement).

But you are spot on about the ARF option not being available under DB BOB's. A Buy Out Bond is still subject to the rules of the scheme is was transferred from. The ARF option is not available under DB schemes so that extends to when the money is transferred out. It should be amended, as should the AMRF requirement. The story was AMRF's were brought in to provide people with an income in old age if they squandered the rest of their fund. Looking at the evidence of how people manage their ARF's, they have no squandered their retirement funds and have been quite prudent in managing retirement funds, so get rid of the AMRF.


Steven
www.bluewaterfp.ie

 

[elacsaplau]

Even if the BOB is was set up as a result of a TV from a DC plan, I remember reading somewhere that the Rules of the BOB (or the original DC plan) needed (to be amended) to provide for the 25% lump sum/ARF option, etc.

I'd be very interested in knowing the position in relation to this.

 

[North Star]

Good morning Dan,

I smiled when reading your post, your sheer frustration regarding the unnecessary complexity of pension planning, is spot on and the feelings are shared by many. And yes its a very fair point, we should have checked if the PRB/BOB came from a DB scheme. I would be very confident that either Steven or myself would have clarified that very early on if it were in a one to one discussion with a client. So what can the OP do?

If Crow Paddy has made any AVCs into his current OPS, then maybe he can access these under the AVC refund scheme to meet his short term need for cash? He can then move the PRB/BOB to his new OPS if he wants to have the ARF option.

Secondly look at the current PRB/BOB and see what the amount of tax free cash is and what portion has to go to an annuity. If it is a very small portion ending up in the annuity then the ARF vs annuity issue may be less important. Make sure to get the tax free cash amount checked. ( we were able to get a client who found us on this site an extra €73k tax free cash than what the administrators were initially offering. Any of the other good advisers who post here would probably have done the same, because a) we take the effort to understand all the complexity and b) we are working for the client and not just getting paid to administer the scheme).

If there is a very large portion going to an annuity, and an ARF would be the preferred route, then as you say there may be exceptions, which advisers like Steven and myself will try to identify for you.

Additionally, the restriction re DB schemes not getting the ARF option is in most peoples eyes an unfair anomaly, and there is speculation that this may be corrected in the near future. So if the OP can wait past the budget there may be a benefit. Please see this previous thread http://askaboutmoney.com/threads/new-buyout-bond-at-age-64.195777/

Re the current complexity, of pension legislation, its difficult to see that changing unless there is some form of superannuation compulsory pension membership introduced, which I dont see happening in the short to medium term.

Therefore while complexity exists, anyone dealing with these type of issues is well advised to pay for some independent expert advice, where the complexity can either be simplified or in some cases that complexity can be used to the clients advantage. In most cases it will turn out to be money well spent.

Elacsaplau - This Revenue ebrief confirmed the ARF option for all BOBs which originated from DC shemes irrespective of the date of the original transfer. I believe industry practice is to assume the DC rules had been amended to allow the ARf option.
[broken link removed]

All the best Vincent

 

[Dan Murray]

Vincent

That's a very good and fair post.

I prefer your simple acknowledgement of the oversight rather than attempts to justify it!!

so when an answering a problem to which you don't have all the facts, you go with the simplest answer.

Like how difficult would it have been for Steven to frame his original answer by - If the source funds of your PRB originated from a DC plan, both options 1 and 2 below apply and if the source funds of your PRB originated from a DB plan, only option 2 applies.


Thanks for the Oireachtas Q&A. It's very interesting – particularly that in response to a simple question, we get a very long answer and of course the obligatory inclusion of the different responsibilities of the different state agencies. God forbid, someone would be responsible for joining the dots! Take the final piece, for example….

Finally the issues around allowing access to the ARF option for BOBs whose values have transferred from DB pension schemes are broader than the tax policy considerations for which I have responsibility and are matters of general pension policy for which my colleague, the Tanaiste and Minister for Social Protection, Ms Joan Burton TD, has responsibility. [Rule 1: Transfer Accountability]

I understand that both the Tanaiste and the Pensions Authority have concerns that the extension of the ARF option as being suggested could have fundamental implications for the DB model and potentially impact both on the Funding Standard and on the benefit promise to DB scheme members. [Rule 2: Create some imaginary complexity – honestly, does anyone have any idea what this could even possibly mean?]

However, I further understand that the issue of ARF access for BOBs originating from DB schemes will be considered by the Tanaiste's Department in the context of a review of personal pension vehicles aimed at rationalising provision in this area, which review will be undertaken this year [Rule 3: Promise action down the road, and this is important - it needs to be action by someone else! It is also important to leave it to one’s imagination where the overlap exists between the “fundamental implications for the DB model” of the previous paragraph to the “review of personal pension vehicles” immediately above?]


Perhaps you are right that the only way the excessive complexity is removed will be in some form of compulsory environment. I haven't really thought about that enough to comment meaningfully. Compulsory pensions presumably have pros and cons and in any case, I think we both agree, are a long way off. But surely, there is a better way of overseeing pensions than the current mess. Look at this simple question.....

- What a person can do with his PRB depends on irrelevant history to do with whether the originating scheme was DB or DC, and

- Even if the originating scheme was DC, there was an added barrier - which was only removed in 2014 – as set out by the ebrief you very helpfully provided.

There are loads of just silly rules like this which add unnecessary complexity to such an important area. Someone needs to be given overall responsibility for joining the dots. I wonder are other areas of public policy similarly dysfunctional?

 

[Crow Paddy]

Interesting information, though disappointing obviously. The amount of money concerned is not big enough to make an annuity feasible. In a way I can understand that the restriction might be justified with a BOB originating in a (still existing) DB scheme. But, surely all bets should be off with a wound-up scheme. I didn't choose to leave the scheme and it doesn't seem to meet any reasonable policy objectives for it to be imposing such restrictions "from the grave". What are the chances even that scenario might be relaxed?

 

[Dan Murray]

Hi Crow Paddy

Sorry that the info is not the "right answer". I've no idea if the discrimination will continue or not.....

As a matter of curiosity, why do you think the restriction might be justified coming from a DB plan? Can't manage to get my head around that one!

 

[elacsaplau]

Thanks Vincent - exactly what I wanted to know.

Dan Murray - this bit is priceless....

I understand that both the Tanaiste and the Pensions Authority have concerns that the extension of the ARF option as being suggested could have fundamental implications for the DB model and potentially impact both on the Funding Standard and on the benefit promise to DB scheme members. [Rule 2: Create some imaginary complexity – honestly, does anyone have any idea what this could even possibly mean?]

 

[JoeRoberts]

I wonder do the insurance companies have a vested interest in forcing annuities from DB scheme BOB i.e. do they make more profits than if an ARF was allowed ?

 

[Steven Barrett]

I wonder do the insurance companies have a vested interest in forcing annuities from DB scheme BOB i.e. do they make more profits than if an ARF was allowed ?

Some do lobby against this rule.

Do they have a vested interest?

With the annuity, they take a chance on how long someone lives. If they die early, they make a big profit. If they live to a ripe old age, it costs them. The charges under annuities are not disclosed.

ARF route: They charge a management fee for the entirety of the contract. When the ARF holder, it passes to the wife where they get a management fee as well.

You could say that under the ARF option, the policy holder has the option of cashing it all in and take it out of the insurance company but in my experience, that has only happened in times of recession when people need cash to keep a business going. Otherwise, people have been very prudent with their retirement funds.

I doubt the difference in profits between the two and the amount of policies it applies to is big enough for it to make a significant difference.

I prefer your simple acknowledgement of the oversight rather than attempts to justify it!!

Dan, that was my thought process at the time. It may have been wrong but that's what I was thinking.



Steven
www.bluewaterfp.ie

 

[Crow Paddy]

Hi Crow Paddy

Sorry that the info is not the "right answer". I've no idea if the discrimination will continue or not.....

As a matter of curiosity, why do you think the restriction might be justified coming from a DB plan? Can't manage to get my head around that one!

Maybe it doesn't make sense to distinguish between DB and DC schemes as such, but I was thinking that unless these scheme rules don't "carry forward" into a resulting BOB, then you might get perverse incentives to leave an employment if it meant being able to get your hands on a lump sum that wouldn't be accessible otherwise. My point was, if that is true (which is speculation on my part) then maybe it shouldn't apply in cases where the scheme is wound up, long after you have left the employer anyway.

As I say, I'm not an expert in these matters... it's just idle speculation.

 

[Marc]

Just one observation here.

Annuities include a "mortality cross subsidy" which means that the "profits" from those who die early are used to improve the annuity rates for everyone. It's a common misconception that the Assurance Company simply pockets the money.