Advice on hybrid PRB/DC pension situation

H

Hesitant

New Member
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7
Hi,

My situation:

Age: 60
PRB: €670K (Zurich 50% Cash/50% Prisma 3)
DC: €1.2M lifestyled
AVC: Maxed
Family: Married, two kids - 1 finishing college 2021, 1 15-yo

Questions:

1.Should I crystallise PRB now taking max cash/ARF option in case pension legislation becomes less benign in upcoming budgets or wait?
2.Any thoughts on current PRB unit allocation?
3.Is there a 'best' sequence of events I should follow e.g. crystallise PRB first, DC first or both at same time etc

I very much appreciate that I'm in a fortunate situation but would welcome any thoughts or strategy advice.

Thanks
 
We are currently writing a detailed guide for these situations.

We have several clients in their mid-40s in this position where they are starting to come up against the Standard Fund Threshold and if they go beyond €2m (technically 2.1M where maximum lump sum is taken) then additional pension returns are taxed at an effective rate of tax of 71%,

If you are planning on staying in work for another few years then you will continue to accrue benefits under the occupational scheme, AVCs and growth in the PRB and you don't have much "headroom" left especially if you plan to work to 65.

So you need to balance an appropriate long-term strategy which takes account of the twin risks of inflation and longevity (your current PRB is too conservative for these risks) and balance that with personal tax considerations and be watchful of the SFT limit.

When you retire, you could take the occupational scheme and the AVCs and leave the PRB to a much later date as a form of tax efficient investment - but again the SFT is a factor here.

Alternatively, you could immediately ARF the PRB but then you are going to be hit with forced income payments at 61 which you may not want if you are still earning.

As you say, you are in a fortunate position so it is worth getting some objective analysis of your options but all this should be in the context of what do you want to do with your retirement

globalwealth.ie

Planning for Retirement - Everlake

Retirement is a life changing event requiring a professional assessment of the life you want to live and a clear strategy of how to get there.
globalwealth.ie globalwealth.ie



Marc Westlake
Chartered Certified and European Financial Planner
www.globalwealth.ie
 
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First of all, I wouldn't be overly concerned about cashing in the PRB at this stage, unless you need access to the lump sum. As Marc said, if you access it now, you will have to start paying imputed distribution from next year onwards. If you are still working, you will pay tax at 52% on this amount.

While no one knows if the Revenue will reduce the €2m limit, there is no noise being made about it. There are lots of public service positions that will hit the €2m limit so I am not so sure that they will look at reducing it that quickly. You do need to keep an eye on the overall value of your benefits and ensure you don't go over the €2,060,000 limit. Once you get to that point, you should mature your pensions. If you are in an occupational pension scheme, you can leave the scheme and carry on working.

50% cash is very conservative. Probably a trade off to product the policy from any downside. The markets happen to be going up but being in cash is that just in case protection. You won't need that going forward when you put the money into an ARF.

With regards to sequencing, as you are close to the €2m threshold, I would imagine it will be a case of maturing both at the same time, especially if there are still contributions going into the DC scheme.


Steven
www.bluewaterfp.ie
 
Many thanks for taking the time to reply. I'll contact Zurich re. the guidepath for the PRB and take it from there. One more question if I may. Is there anything that can protect you in the unlikely event that on the day you issue instructions to mature the funds that there is a sudden market crash? Can you insure against this or request that the funds not be matured in the event that there is x% drop in the fund value from the previous close etc? Sorry if a bit too hypothetical!
 
The biggest one day move in history was Black Monday in 1987 when the market dropped over 22% in a single day.

On average daily moves on global stock markets are much smaller and any day picked at random has a roughly 50% chance of being an up day or down day.

Your pension is not 100% invested in the Stockmarket, holding other assets and in particular bonds will ensure that your portfolio doesn’t drop anything like this much but you should not be focused on the day you plan to retire but much more on the process leading into and out of the retirement period.

The idea behind a lifestyle Strategy is that the pension automatically derisks as you approach retirement to protect your fund.

The problem here is that the day after your retirement you will most likely be holding an ARF unless you plan to buy an annuity.

An ARF needs to remain invested and in order to provide sufficient returns you need to consistently take a reasonable amount of investment risk.

so the strategy you should be taking now should reflect the risk you are likely to be taking in retirement

[broken link removed]
 
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Hesitant said:
Many thanks for taking the time to reply. I'll contact Zurich re. the guidepath for the PRB and take it from there. One more question if I may. Is there anything that can protect you in the unlikely event that on the day you issue instructions to mature the funds that there is a sudden market crash? Can you insure against this or request that the funds not be matured in the event that there is x% drop in the fund value from the previous close etc? Sorry if a bit too hypothetical!
Click to expand...

When you send in instructions to mature your policy, it is moved to cash as at the day after the instructions is sent (all changes in funds are priced the day after to stop people day trading with their pensions). So if there is a crash while they are maturing your policy, the money is protected.

As Marc pointed out, most people invest in ARF's these days so you will be going back into the market with your ARF. What you are really protecting is the tax free lump sum. The lump sum can be a significant amount, in your case if you get your fund to €2m, it will be €440,000 payout after tax. Even a 10% fall in fund value would see you lose €44,000. Someone telling you that you also get to buy into your ARF cheap won't offset the bad feeling of getting a cheque for €44,000 less than you thought you were getting.


Steven
www.bluewaterfp.ie
 
Steven Barrett said:
Once you get to that point, you should mature your pensions. If you are in an occupational pension scheme, you can leave the scheme and carry on working.
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Is there an argument in favour of simply switching all funds to cash when you hit the €2.1M limit, if you're not ready to finish working at that point?
 
Dave Vanian said:
Is there an argument in favour of simply switching all funds to cash when you hit the €2.1M limit, if you're not ready to finish working at that point?
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Yes, of course, that is certainly another option and avoids the imputed distribution obligation. You will of course see the value of your pension begin to fall as you will still be paying fees for the money to sit there in cash. With the OP being over 60, they have options that aren't available to others who are pre retirement age.

Steven
www.bluewaterfp.ie
 
If a person wasn't in good health, in a scenario like this, it may be worth considering maturing the DC and letting the PRB sit as the full value of the preserved benefit via the PRB would be paid to the estate.

Gerard

www.prsa.ie
 
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