Should I keep deferred pension or transfer it?

Hi all.

Looking for insight on a pension-related decision. Going through the redundancy process. My current employer offered a Defined Pension. I have a choice to leave it as a deferred pension or transfer it. Due to retire in ~20 years. The two options:

• Deferred Pension of €52k / year on retirement
• Transfer of Benefit of €404k

Thoughts?

What are the indexation arrangements for the DB pension?

In my view, when considering any defined benefit pension arrangement, the default position, should almost always be to consider that the existing DB scheme is the most suitable option for your needs and that you should only consider a transfer if it can be clearly demonstrated that it is in your best interests to do so.

If you were to take that transfer value and invest it really well it should (but might not) double every decade so in 20 years you could have a fund value of say €1,616,000.

If you took that fund TODAY and tried to match a typical DB pension for a 60 year old you could buy an inflation protected annuity with 50% spouses benefit (and this is before taking a lump sum) of €46,100pa.

So on a reasonable set of assumptions you are almost certain to fall short of the pension you would be giving up.

If, for example, you were in catastrophically poor health then you might take a different view. But on average, it’s a very tall order to expect any personal arrangement to keep up with what you would be giving up.

The transfer value will increase each year by around 8% to 12%pa and so you would be well advised to seek another transfer value just before normal retirement date.

I have a client who had a U.K. scheme offering £17,000pa at age 60 or a £1m transfer value. He took the transfer.

Dr Strangelove said:

What are the indexation arrangements for the DB pension?

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Dept of SW set the rates each year. Pretty much same as cpi.
The transfer value seems to be a bit above the minimum but the minimum is low as so far out from retirement.
So unless there are funding issues in scheme the deferred option seems best for the moment. They may come with a better enhanced offer in a few years. And the minimum tv value increases every year as you get closer to retirement.

How old are you now and what is normal retirement age? Is there a survivor’s pension?

I think @Marc is on the right track but I comparison with an annuity at 60 might not be fair as normal retirement age is usually 65.

It depends a bit on your other likely retirement income and risk tolerance. About 70% of my retirement income is likely to state and occupational DB pensions. So with the pension fund I have from a previous employment I am happy to leave it in all equities.

Thanks for the feedback so far. Very helpful.

Additional details below...

What are the indexation arrangements for the DB pension?

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From the FAQ - Does my deferred pension revalue before retirement? Your pension will be revalued each year up to 31st December preceding your retirement. The annual rate applied will be the lesser in each year of 4% or the rate of change in the Consumer Price Index (which may be negative for the period).

How old are you now and what is normal retirement age? Is there a survivor’s pension?

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I'm 46. Retirement age is 65.
From the FAQ - Is there any benefit payable on my death after I retire? Your pension is guaranteed to be paid for 5 years and for your lifetime thereafter. A spouse's pension of 50% of your pension would be payable on your death after retirement, or if later, from the expiry of the guarantee period.

So unless there are funding issues in scheme the deferred option seems best for the moment.

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I understand the scheme is well funded

I would assume a 5% annnual inflation-adjusted return from equities over the long term. Over 19 years this would turn your €404k to about €1m in 2025 prices.

So your choice is (all in 2025 prices) between a guaranteed, inflation-linked €52k per year from 65 with survivors benefits or an ARF with an expected value of €1m in it that you can take 25% tax free at 65 with a minimum drawdown of 4% until 69 and 5% from 70. Residual ARF passes tax free to spouse on death or taxed at 30% if an adult child inherits it. By contrast a guaranteed pension is gone whoever dies last, you or your spouse.

For me it’s a kind of a toss-up. Decision should depend on your total household expected retirement wealth from all sources. Age of spouse is a big factor too - a survivors pension is far more valuable if a spouse is ten years younger than you than if they are ten years older.

Age of spouse is a big factor too - a survivors pension is far more valuable if a spouse is ten years younger than you than if they are ten years older.

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She is a couple of years younger than me.

Decision should depend on your total household expected retirement wealth from all sources.

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- Partner's pension is small as she has taken a career break.
- I'm maxing my AVCs for 2024 & 2025 (€20k/yr) with the redundancy payment. I didn't previously as I was at risk of SFT.
- With the increase of SFT & new job lined up, I'm thinking I will max out contribution / AVCs going forward (2026 & onwards).

So

Dr Strangelove said:

It depends a bit on your other likely retirement income and risk tolerance. About 70% of my retirement income is likely to state and occupational DB pensions. So with the pension fund I have from a previous employment I am happy to leave it in all equities.

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Just checking my understanding - because of your occupational DB pensions, your risk tolerance is higher so you're all in with equities. Right?

sm7940333 said:

With the increase of SFT & new job lined up

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If you will be adding to pension fund going forward you’ll already have an equity exposure so maybe you can hedge by taking the DB pension. A younger spouse tips the balance this way too.

But it’s pretty close.

The gap between todays "market value" (likely 1.1m +) of the deferred pension and the tv offer is too great for me. And always will be for someone that far away from retirement unless there is a really significant enhancement which is difficult to achieve when trustees need to enhance all members against the minimum tv. The minimum tv calculation works badly for younger members.

sm7940333 said:

Just checking my understanding - because of your occupational DB pensions, your risk tolerance is higher so you're all in with equities.

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Yes. Geographical factors too. I’ll have a UK state pension as well as Irish state and occupational pensions so I deliberately have my pension fund in US and Asian equities.