65 end this month - do I need to make a decision on my Buy Out Bond now?

[Prosper]

Hopefully one of AAM pension gurus will give me some advice on this. I’ll be 65 in a couple of week’s time. I have an Aviva Buy out Bond and I need to decide what to do with it. Here’s the facts:

• I’m single with no children and own the house I live in.
• I’m self employed (sole trader) for the last 13 years, since my career job ended, but in reality I only earn pocket money from what I do (it’s more like a hobby) and so have paid very little income tax in last 13 years. Largely I live off savings (I cash in some of my State Savings when I need money).
• I have private health insurance and have good health (despite being a light smoker).
• My annual living expenses are €14,000
• Not taking account of any unforeseen costs, I won’t run out of money for another 14 years and so I won't need to access the Buy Out Bond money until then.
• The Aviva Buy Out Bond is in a level 5 risk (level 7 is highest risk) and is currently valued at €153,000

After reading through the Aviva documentation, I believe my options are:

1. Do nothing. Leave the €153k where it is for the next 10 years until I’m 75 at which point I have to make a decision on what to do with it.
2. Transfer the money into an AMRF and maybe take 25% in tax free cash now and possibly draw down 4% p.a. (max allowed) until I'm 70 and then 5% until I’m aged 75. At that point the money transfers into an ARF.
3. Transfer the money into an ARF now. An ARF gives more flexibility in terms of how much you can take out of it, as needs be, but I don’t believe this is an option for me as I don’t think I’ll have a guaranteed minimum income of €12,700. The pensions section of DSP will not be able to tell me what state pension I’ll be untitled to until I’m 66.
4. Leave it where it is until next year when I’m 66 and know what my guaranteed income from the state pension will be and whether I can put it into an ARF.
5. There are other options, such as the Annuity, but I don’t think these are realistic options for me.

Some other points that may be relevant:

• When I finished education I went travelling abroad for a couple of years. On returning to Ireland it was very difficult to get a proper job. So it wasn't until 1982 that I started paying regular income tax.
• In 1992 I gave up the PAYE job and became self employed in a start-up business. After 3 years, in 1995, I ran out of savings and had to go back into a PAYE employment as a sales executive. So there was a 3 year gap in contributions.
• In 2008 I lost this job and so took up the sole trader "hobby" job referred to at the beginning.
• In 2008 my final pensionable salary was recorded as €45,000 and I made no additional contributions after that.
• In 2009 the pension plan of the company I had worked for was wound up and transferred into a Personal Retirement Bond with Hibernian Life (now Aviva).

Finally, I have to admit to something stupid. Back in 1992 when I was self employed, I took out a Zurich Self Employed Rainbow Pension. When the business venture didn't work out for me I didn't end the pension but simply continued to pay the bare minimum into it until I closed it off in 2001. I actually forgot I had this investment until I started thinking about what to do with my Aviva pension. The current value in this Zurich pension is €32,000. Apparently, I cannot transfer it into the Aviva Buy Out Bond and also I believe you cannot have two AMRF/ARF funds.

Any advice would be much appreciated.

 

[Marc]

We generally advise people to draw down taxed savings first and leave pensions for as long as possible when tax planning is a factor. You can defer the pension to age 75 but why would you? Your retirement fund should be there to provide you with financial security for the whole of the rest of your life, its not really designed to provide a bequest.

In your case there is absolutely nothing wrong with buying an annuity since it will give you an income for life however long you might live with nothing left at the end

I make the annuity current payable 5,783pa if you add that to a full state pension your tax looks something like this

So the tax free lump sum might not be that valuable to you

And this is the projection for the same income taken from a conservative ARF

This is more complicated than it seems!!

Marc Westlake
Chartered Certified and European Financial Planner
www.globalwealth.ie

 

[Prosper]

Thanks for replying @Marc. The reason I think an annuity doesn't suit me is because after taking the 25% tax free amount I would then only receive an annual payment of just under €4,000 and couldn't change my mind about an annuity once I take that option. I think I'm right in saying that an annuity is based on current interest rates and so appreciation would be very small. Also, because I have no immediate family (no wife or kids) any residual funds could not be of benefit to my brothers children. Although my pension fund is very small I'd still like to think that when I die, whatever remains in the fund would pass to my estate and so would benefit the beneficiaries in my Will. This is why I'm thinking of doing one of the 4 options outlined in my original post.

 

[Steven Barrett]

You are under no obligation to mature your policies at age 65, you can mature them at any age up to 75 (if you don't do it by 75, it's then locked and you can't access it). You can access one of the pensions now if you want and take the lump sum and the other at a later time. Also, the Revenue are recommending that the AMRF is done away with as it is not fit for purpose. This will most likely happen in the Finance Bill.

While your cost of living is pretty cheap, is there anything that you would like to do with the money? Go on a few trips or anything else? What about your brother's children? Giving them a few quid now, you would get share their enjoyment of the money instead of when you are dead (which is probably a good while away).

But there is certainly no rush to have to mature your pensions because you are hitting 65.


Steven
www.bluewaterfp.ie

 

[Brendan Burgess]

We generally advise people to draw down taxed savings first and leave pensions for as long as possible when tax planning is a factor. You can defer the pension to age 75 but why would you?

Hi Marc

This seems contradictory?

Largely I live off savings (I cash in some of my State Savings when I need money).

He should live off his savings and not draw down the pension until he needs it. If he savings run out when he is 70, then draw down the pension.

Brendan

 

[Brendan Burgess]

In your case there is absolutely nothing wrong with buying an annuity since it will give you an income for life however long you might live with nothing left at the end

The decision to be made today is when to draw down the pension. It seems clear to me that he should leave the money where it is until he needs it.

When he has to draw down the pension, he can decide between an ARF and an annuity. If he had to make that decision today, an annuity would not be a good idea. But the tide could turn towards annuities in 5 years or in 10 years. But he does not need to worry about that now.

Brendan

 

[ginslia]

Option2 as stated above does not match my personal research on this topic (not an expert)
My understanding is that when you decide to access your fund
- you take you 25% tax free lump sum first
- then you put aside 63,5k for an AMRF if you don’t have the guaranteed income requirement
- whatever is left can go into an ARF

So your fund is 153k, 25%=38k approx, and this comes out first. Balance =115k, less 63.5k into an AMRF, leaves 51k approx for an ARF.

have you checked your PRSI contribution statement? That should give you some idea whether you qualify for the minimum state contributory pension (520 paid stamps required), and if so, count all relevant paid and credited contributions to get an rough estimate of your average stamps (from 1982 to date). The statement/letter has the details of what prsi classes count for the pension, and citizens advise has the tables showing how much you get based on different average contribution levels.

 

[Sarenco]

The pensions section of DSP will not be able to tell me what state pension I’ll be untitled to until I’m 66.

Do you know the number of paid and/or credited PRSI contributions you have made since entering insurable employment?

If you have that information (which is available from the DSP), you should be able to work out your State (Contributory) Pension entitlement and whether it makes sense for you to make any voluntary contributions to boost your entitlements.

 

[Prosper]

You are under no obligation to mature your policies at age 65, you can mature them at any age up to 75

So I can take the Do Nothing option and then at some future, date before age 75, I can then engage with Aviva Direct and decide what to do?

is there anything that you would like to do with the money? Go on a few trips or anything else?

Yes, I'd like to travel around Europe for a while.

put aside 63,5k for an AMRF if you don’t have the guaranteed income requirement
- whatever is left can go into an ARF

That's a good way around the guaranteed income issue. Also, I think the balance that's in the ARF is accessible, unlike the AMRF money.

have you checked your PRSI contribution statement?

Spoke to them today and the statement is being posted to me.

If you have that information (which is available from the DSP), you should be able to work out your State (Contributory) Pension entitlement and whether it makes sense for you to make any voluntary contributions to boost your entitlements.

If I come up short on the state pension then I'll contact the Self Employed Voluntary Contributions Section of DSP.

 

[Kerry Gooner]

Is there a danger with the do nothing approach that in the future the government seeking additional revenue would reduce the 25% tax free lump sum rate.

 

[Prosper]

Crikey, I hadn't thought of that.

 

[Gordon Gekko]

Why is everyone talking about maturing the pensions at age 75? Buy Out Bonds mirror the Normal Retirement Age of the scheme from which they originate, so the max is 70.

That old Zurich Scheme might possibly have an attractive guaranteed annuity rate attaching to it, given its age. Worth checking out.

 

[Brendan Burgess]

That old Zurich Scheme might possibly have an attractive guaranteed annuity rate attaching to it, given its age. Worth checking out.

That is an excellent point.

Prosper - what this means is that in some very old policies, they actually guaranteed an annuity rate of, say, 8% on retirement. This would make an annuity fantastic value. Check with Zurich what the annuity rate is.

Brendan

 

[Prosper]

Will do. I'll check it out Monday

 

[Prosper]

Why is everyone talking about maturing the pensions at age 75? Buy Out Bonds mirror the Normal Retirement Age of the scheme from which they originate, so the max is 70.

Hi Gordon, I thought it was 70 also but the Aviva Direct person in answer to my question re the "Do Nothing" option, confirmed that I could simply leave the money in the Buy Out Bond but to be aware that "a decision on how you wish to proceed with maturing pension benefits will have to be made by your 75th birthday".

 

[Brendan Burgess]

Prosper

Don't sweat this issue. The rules may well change over the next few years.

So check again when you are approaching 70.

Brendan

 

[Prosper]

Ok will do. I'll leave both pensions as they are and review in 5 years time.

 

[GSheehy]

Why is everyone talking about maturing the pensions at age 75? Buy Out Bonds mirror the Normal Retirement Age of the scheme from which they originate, so the max is 70.

For a 'standard' PRB/BOB the maximum NRA would generally be age 70 which is the maximum NRA for the vast majority of schemes in Ireland, however it is possible to receive approval for an NRA of between 71-75 from revenue.

A QROPS PRB/BOB can accept transfers from UK Occupational Pension Scheme’s (DB or DC), UK Personal pensions (including but not limited to Self Invested Personal Pensions, Stakeholder Pensions and Free Standing AVC’s) and UK Section 32 Buy Out Bonds. As some of these products may have NRA’s up to age 75 the product provider would mirror same under QROPS PRB.

Gerard

www.prsa.ie