DB Pension query

B

Boston Guinness

Registered User
Messages
16
Hi all, just some quick questions on my pension situation.

I have a Defined Benefit pension with my company which was closed in 2010. At that time, the company offered a choice to keep enrolled in the DB plan or they would buy me out and put €220k into my separate Defined Contribution (AVC) pension plan (their calculation as to what my DB pension cost in the market place at that time).

When the scheme closed in 2010, I had been 9 years with the company and the last pension benefit statement I received in 2019 confirmed that upon retirement I would get €9,135 p.a. (if my employment was terminated on 01/01/2019). I just turned 60 and now doing a little spring clearing on my finances. I still work for the same company and retirement age is 65. I've asked for an updated pension benefit statement.

In effect I have a DB pension with my company which pays out €9,135 p.a. on retirement (as of 2019);
I have an AVC separately which has approximately €320k in it and I'm contributing monthly into it.

When I retire, I can take out 25% tax free lump sum. However, I'm not sure which scheme I can take out this lump sum amount...the Defined Benefit scheme or my AVC scheme (Defined Contributory scheme). If I take the lump sum from my AVC scheme, it's pretty easy to calculate as I know how much is in that account. However, if it's from the DB scheme, how is the 25% lump sum deducted? Is it on the market value of the plan at the time I retire?

Sorry if the post isn't clear but pensions are a little daunting to me....just trying to get a handle on it. Thanks!
 
Boston Guinness said:
When I retire, I can take out 25% tax free lump sum. However, I'm not sure which scheme I can take out this lump sum amount...the Defined Benefit scheme or my AVC scheme (Defined Contributory scheme).
Click to expand...
You can take the lower of 25% or €200k cumulatively from all pensions that you hold and you don't have to do so in one go/at the one time - e.g. different pensions can be retired at different times.
 
Thanks, Clubman. Does that mean when I retire, I can take 25% of both my DB plan and AVC. For instance, if my DB plan is valued at €220k (market value) at time of retirement and my AVC plan is valued at €340K at time, I can take 25% of the combined value of €560k, which comes to €140k.

Sorry if this is dumb question and I will get professional advice closer to my retirement, but just trying to wrap my head around what I can actually take out tax free when the time comes and how it's calculated.

Thanks!
 
I haven't come across it before in this context but I'd definitely ask about whether you'd be in a worse position by taking tax-free cash from the DB benefit.

It used to happen when folk had a guaranteed annuity rate with one personal pension and no guarantee with another. Revenue rule said that you had to take 25% from each pot but they were okay with taking all of it from the non-guaranteed if taking 25% from each put you in a worse position. It usually did as guaranteed rates were circa 10%.


Gerard

www.prsa.ie
 
A hybrid of DB and DC for the same employment can become very complicated, I would recommend contacting a financial adviser as there is a myraid of options
 
Hi Early Riser, no I didn't draw down the DB pension in 2019. It was closed in 2010 with no more contributions allowed and the last benefit statement I got was in 2019. I'm still working for the company and am due to retire when I turn 65. Just need clarity as to what lump sum I can take out if I have a DB plan and DC scheme (AVC's)....is it 25% of both pension plans or 25% of just one plan?
 
In general, DB schemes have rules as to lump sums, etc - ask your HR department for a copy of the DB schemes rules
 
If you take a lump sum from the DB pension you get a smaller pension. Calculations can get complicated. HR or pension advisor should be able to advise
 
Boston Guinness said:
no I didn't draw down the DB pension in 2019. It was closed in 2010 with no more contributions allowed and the last benefit statement I got was in 2019. I'm still working for the company and am due to retire when I turn 65. Just need clarity as to what lump sum I can take out if I have a DB plan and DC scheme (AVC's)....is it 25% of both pension plans or 25% of just one plan?
Click to expand...

Ok. If you had drawn down the DB pension at 60 any lump sum (defined by the terms of the scheme) would have counted towards the lifetime limit of €200k. You could then take 25% from the DC scheme up to this limit. But this does not apply.

I just wonder what is the advantage of continuing to maintain the DB pension? I assume that as you have turned 60 you could draw it down as per its stated benefits. If the benefits are payable from 60 why are you not drawing them - it is not as though the benefits will grow any further? Alternatively, will they give you a lump transfer value out of the DB scheme to a buy-out bond, ARF or whatever?

In your shoes I would be looking for a good independent adviser.
 
I don’t think the OP said anywhere he could draw down his DB at 60. He is 60 now, and the last DB statement he got forecast ~9K PA on retirement, at 66. The forecast changes a little each year so he is looking for a current forecast. In general if you draw down the DB scheme before retirement age the value reduces by ~3% PA, so normally not worthwhile.

It is a very good question whether to take the 25% (max €200K) from one or both but GSheehy had an interesting point above.
 
The tax free from the DB scheme will be based on the years of service rule: with 9 years service you will get 3/80 x 9 x final salary when you exited the scheme. Your annuity will then be reduced to reflect this. There is no 25% pot for the DB, unless you are able to retire it and get a transfer value transferred into an ARF.
 
Please contact your Hr department and they will get the information from the pension administrator. There will be a number of options And There is a lot of wrong information above. All tax free cash amounts are capped at €200k, but the Next €300k arising from any of the formulae is taxed at 20%

So your Tax free lump sum will be based on years service in the company which is over 20 years now. It’s not just based on the DB scheme service.
you can get 1.5 times your final remuneration ( which is based on taxable earnings), the max for most people will be basic salary in the previous 12 months plus an average of other emoluments over the previous 36 months. you can look back ten years too, which might work for people with large fluctuations in bonuses. this tax free amount can be taken from the dc/avc pot rather than reducing your DB pension.

so for example you have your DB pension, you have €80k in your basic DC pension ( which includes employer contributions) and €100k in your AVC, and you are entitled to a TFC of €120k. You can take that from €80k in the DC and €40k from AVCs and take out an ARF or buy an annuity with the remaining €80k.

Now if you have €150k in the DC you could take the €120k from their but you would need to buy an annuity with the remaining €30k. The AVCs can still be taken as an ARF.

alternatively if you transferred the DB into the DC just before retirment , then you have one pot of money and you can follow the 25% rule,

for all these options, it’s worth comparing what it would look like if you converted some of the DB for cash also, but you would still need to buy an annuity with the DC pot which has employers contributions in it. Annuity prices have really fallen recently so it would be good to get a full analysis. ( transfer values of DB pensions close to retirement will also have fallen)
 
DBL2018,

Really excellent post.

Just for clarity, when you say

DBL2018 said:
[After converting DB to DC]..........but you would still need to buy an annuity with the DC pot which has employers contributions in it.
Click to expand...

Is this where the TFLS is based on the salary + service basis (i.e. it doesn't apply when the TFLS is simply 25% of the new combined fund)?

Also, there had been talk about discontinuing the mandatory purchase an annuity where the TFLS is based on salary + service........any idea where this is at?


Thanks again.
 
DBL2018 said:
So your Tax free lump sum will be based on years service in the company which is over 20 years now. It’s not just based on the DB scheme service.
Click to expand...
You are confusing Revenue rules and scheme rules. The OP is asking where the lump will come from.
The max that can come from the DB scheme will be based on 9 years . The scheme rules ( unless they are very unusual) will not allow for service post closure in the lump sum calculation.
Then he has a lump sum from the DC scheme based on the rules of that or based on 25% of the fund if he goes the ARF route.

If he goes with the years of service rules then full service is of course applied in determining how much of it can be tax free.
 
Revenue have special rules for scenarios when db accrual was ceased and further accrual is in a dc scheme. It’s not clear if this is what has happened here as it appears he only has avcs and a db? Unless I have misunderstood the scenario.
 
The query should really be posed to the RA/trustee of the scheme as they will have all the facts. We can give a steer but it’s difficult given the information provided.
 
You must log in or register to reply here.
Back
Top