Conundrum - Should I take a DB pension or take out an ARF with transfer of funds instead.

R

rgib64

New Member
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6
Hi,
Looking for some advice here!
I'm 60 years old, I've just retired, 40+ years on class D stamp. Being offered a pension of c. 27k or transfer value of c. 600k. The pension fund is stable and fully funded, I'm told.
I'm divorced, have no other income and won't get anything from the state as far as I'm aware. I am/will be mortgage free.
The BIG question for me is: should I take the monthly pension or open an ARF with the 600k. I really have no clue about financial markets etc.
I suppose I have a medium attitude to risk generally, but would worry a bit about having no other income, in the event of some market catastrophe. I know that markets recover, but what happens to income from ARF in the meantime puzzles me.
I'm reasonably healthy, so expect to live for a while yet! I like the notion that there might be something left in ARF to leave to my (two) children when I depart this particular life.
My head is melted thinking about the different scenarios. Need to make a decision soon.
Suggestions on a postcard please...
 
TBH, I wasn't planning to. I've worked for over forty years and feel that is enough for one lifetime.
 
Is the 27k inflation linked?
 

I think you might have to give a bit more info on other assets (and liabilities if any) - savings, investments etc to get a more nuanced answer, but in the end only you can decide on the big question - whether to accept the inherent risk of an ARF or not. It looks to me like the only way you can leave a lump sum to the kids is via an ARF, but do they need it? If they're doing OK, then getting the residual ARF in (hopefully) 30ish years is of limited value. If they're not OK, and eyeing up your ARF, then get yourself some distance!

You wonder what happens an ARF in a market catastrophe. They answer I'm afraid is not a puzzle - it drops in value, and you encounter the sequence of returns problem, where if you continue to draw down a fixed amount, you could deplete it early. You can cut your payments to mitigate, but in almost all cases, can't go below whatever the deemed withdrawal rate (4% from age 61, 5% from age 70).

Another thing to consider is that you can go both ways with the lump sum - you can invest some % in an ARF, and the remainder in an annuity, which further mitigates against market downturns. You can convert some of the ARF in to an annuity at a later stage too if you change your mind.

I think it would be very worth your while talking to a fee based financial advisor, of which there are a few regulars on this forum.
 
An important question before proceeding: will the €27k be indexed in the future?
Advantages of Annuity:
- guaranteed income for life
- no need to worry about investment markets
- if it’s your only income in retirement, security might be important
Disadvantages:
- no benefit payable on death (but so what….you’re dead)

Advantages of ARF
- drawdown flexibility, but a minimum drawdown of 4%pa to age 71 and 5% thereafter
- possibly leave something to children on your death……possibly (but do they need it?)

Disadvantages
- you have to invest the €600k, so investment risk
- you have to drawdown a minimum of 4%/5% pa. So what investment return will you seek (allowing for additional 1%pa management charges) and what investment risk would that require?
- if there is a bad run in markets for a few years, it could impact your income drawdown significantly
- possibility that you outlive the fund
- volatile market performance make seriously impact your sleep

Without being facetious, I can tell you which is best - ARF or Annuity - if you can tell me when you plan to die…..but I suspect you can’t. The average life expectancy for a male retiring at age 60 is about 25 years. But some will live longer. If this is going to be your only income in retirement, do you need to take investment risks, do you need the uncertainty, do you need the possible sleepless nights ?
 
Separate from your conundrum.

You should aim to get a partial State Contributory Pension.
This would involve getting one paid class A Prsi contribution and then making Voluntary Prsi contributions or drawing down at least 5k yearly from an ARF up to age 66 or 70.

There is information about this in this thread.

Key Post - PRSI and planning retirement

This Key Post is in the form of a FAQ where I don't know many of the answers. I will update the post as I get answers. 1. PRSI payable on reaching state pension age Answer: 0 (Class M) 1a. Does this relate to the start of the tax year in which you become 66? Or to after your birthday? Answer...
www.askaboutmoney.com
 
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If you need some time to think about it or cannot take a decision get an ARF now. Having the lump sum will allow you to reduce the distribution (amount cashed from your ARF) to a minimum. It needs to be at least 4% now as already mentioned. You can always buy an annuity at a later time.
Normally you can buy an annuity before 75 years old and the % offered will be greater the older you are.
You cannot buy an ARF from an annuity.
 
The annuity rate appears to be above current market rates. Is it an all or nothing choice - eg. would they allow you €300K @ 4.5% and balance to ARF?

Based on the limited data provided, the rate quoted is probably closer to the rate of a 65 year old, on the current open market.

If you do go for an ARF with all/some of the fund I presume you'd be conservative in your choice of mixed fund for investment? Something that's been hitting the 5/6% pa over longer term as opposed to the 10/12%pa. If so, then the cost of the ARF in terms of AMC will have a bearing. You should be able to get 0.50/0.60%pa so that's not as much of a drag as a 1% pa contract. That €1,400/€1,500 saving would buy you a lot of advice in any one year. If you wanted to keep the Annuity option open to yourself then you have to look for an ARF contract that didn't have early exit charges in the first few years.

It would be an interesting conversation to have with the children about whether you should take some risk here, seeing as they may be potential beneficiaries. Your fear is running out of money. Would they come to your rescue if you did or have they enough on their plates just to tell you to look after yourself as they couldn't carry any/some of the risk of that.


Gerard

www.prsa.ie
 
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rgib64 said:
I'm 60 years old, I've just retired, 40+ years on class D stamp. Being offered a pension of c. 27k or transfer value of c. 600k. The pension fund is stable and fully funded, I'm told.
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rgib64 said:
TBH, I wasn't planning to. I've worked for over forty years and feel that is enough for one lifetime.
Click to expand...

rgib64 said:
I suppose I have a medium attitude to risk generally, but would worry a bit about having no other income, in the event of some market catastrophe.
Click to expand...
rgib64 said:
There is a lump sum, about 90k.
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As you are Class D I take it you will not qualify for a State Pension.

Based on all of the above I would be looking at the €27K and the lump sum. With the caveat that I did not have some concrete evidence to believe that I had a foreshortened life expectancy.
 
rgib64 said:
There is a lump sum, about 90k.
Click to expand...
You might also put some or all of this into an ARF and follow @S class's suggestion regarding qualifying for a pro rata State Pension (and Treatment Benefits):
S class said:
You should aim to get a partial State Contributory Pension.
This would involve getting one paid class A Prsi contribution and then making Voluntary Prsi contributions or drawing down at least 5k yearly from an ARF up to age 66 or
Click to expand...
 
Dr Strangelove said:
You need to find out! What do the terms of the offer say?

Over 25 years 2% inflation per annum would reduce the purchasing power of your pension by 39% if it is not linked to inflation.
Click to expand...
There's no way to find out if they are at the trustees' discretion.
 
Thanks for all the posts, very informative and thought provoking. Please excuse this long reply, but the system is making me wait hours between replies, so I'm kinda bundling a few together.

Following divorce settlement I have some money, all of which, along with the 90k lumpsum, is going into buying somewhere to live! No other liabilities.

Pension increases are discretionary, so there is no way to know what they will be.

I did have a session with what I thought was a fee-based independent advisor, but they seem to be more interested in selling a product than actually advising. Maybe I didn't ask the right questions. As I said, I'm not familiar with all this finance stuff.

It is an all-or-nothing choice: take the pension or take the transfer value in an ARF.

I could be wrong, but I don't believe that I could take out an ARF now, and 'cash it in' to purchase an annuity at a later date.

I did speak to welfare about partial or pro-rata contributary state pensions but was met with blank stares and "you need a minimum of 520 stamps". I will try to re-enter their orbit again to see if the next person has anything different to say. I think the pro-rata pension would be an option. I don't really understand the rules but apparently if I pay a class A stamp this year it will convert last year's stamps to class A too. Would a credit stamp do the same I wonder.
 
rgib64 said:
I did speak to welfare about partial or pro-rata contributary state pensions but was met with blank stares and "you need a minimum of 520 stamps"
Click to expand...
And with 40+ years on Class D you easily meet that condition. However, you also need a minimum of 260 full rate paid contributions. Credited contributions won't do for this purpose (although they will help if over and above the 260 full rate paid contributions):
  • You have a minimum of 520 PRSI contributions (full-rate and modified-rate)
  • You have at least 260 full-rate paid contributions since your entry into insurance

Pro-rata pensions

You may get a pro-rata pension if you have a mixed insurance record, for example, if you worked in both the public service and private sector.
www.citizensinformation.ie
 
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