A professional financial advisor will run through a structured process to allow you to make the decision that is correct for you
In recent years the vast majority of Defined Benefit Pension Schemes have been restructured or in many cases closed completely.
The reason for this has been the cost of providing a guaranteed pension for life for members has proved prohibitively expensive. The cost of purchasing an Annuity (payment for life) has become increasingly expensive because people are living longer, interest rates are lower and less people are purchasing annuities
Firstly, let’s ask the question, what exactly is a “Defined Benefit Pension?”
They were originally designed to provide retired employees with a guaranteed monthly payment for life. That payment was based on a percentage of salary, which largely depended on the employee’s level of service, so after 40 years of service an employee would get a pension of approximately two-thirds of their final salary.
There were also spouse benefits in the event of the pension holder passing away.
The 'Rolls Royce' of pensions
For a long time they were the privilege of public sector workers, employee of the larger banks and semi state businesses, they were considered the 'Rolls Royce' of pensions.
Along with closing Defined Benefit Schemes, companies have taken the next step and have started to offer members a Transfer Value to take the pension liability of the company books and into the employee’s own name. In certain cases, companies have offered what are known as 'Enhanced Transfer Values' to encourage employees to take the offer.
If you are in the position of having been offered a Transfer Value (TV) or Enhanced Transfer Value (ETV) then you have a major decision to make.
You have to decide whether to take the transfer value and assume responsibility for the pension yourself or leave it as it is and avail of the defined payment for life at retirement.
The default answers is often to leave it where it is, don’t accept the TV, this may be the correct option in the majority of cases. In reality the decision is usually far more nuanced and requires a more in-depth analysis. A professional financial advisor will run through a structured process to allow you to make the decision that is correct for you. They shouldn’t advise you either one way or the other but rather provide the best information to aid you to make the decision.
The main items to explore as part of the process are as follows:
Conduct a detailed fact-find to get a clear idea of your current financial position, future plans and sources of income.
Your attitude to risk and ability to cope with risk both financially and emotionally.
A detailed cashflow comparing your income if you retain the Defined Benefit pension versus if you take the transfer value.
A Net Worth statement showing your position if you retain the Defined Benefit pension versus if you take the transfer value.
Is passing on wealth to the next generation a priority for you.
The state of your health, your overall family health situation and your life expectancy.
Once armed with the information above you are in a much better position to make an informed choice. The default answer is No but in certain circumstances it may make sense.
How close are you to retirement?
Some of the scenarios where it might make sense are as follows;
If you are in poor health and you might not benefit from many years of pension payments.
If you are concerned about your employer’s willingness and ability to support the scheme over the long term.
If you enough independent sources of income where you don’t necessarily rely on the Defined Benefit pension payments as your only source of income.
If your spouse has pre-deceased you and you’ll never avail of Spouses benefits.
If you’d like your Pension benefits to go to your children when you die.
Historically people would never have considered leaving a DB scheme. The benefits were guaranteed and no one ever questioned that they might not be paid. Things are very different now and anyone with retained benefits in a DB scheme needs to consider their situation.
Since 2005 almost 40% of Defined Benefit schemes in Ireland have been wound up or closed.
Of those that remain, almost half are in financial difficulties and are not meeting the minimum funding standard.
Employers simply can no longer meet the high costs associated with paying the benefits that have been ‘promised’, but not guaranteed, to their employees.
Taking a transfer value offer from a DB scheme is an irreversible decision, you should always seek professional Financial advice before making such an important decision. The optimal financial decision can never be known without the benefit of hindsight, but time and advice can help you make the decision that is right for you.
Conor Harte is a Financial Planner with Wealthwise Financial Planning who are based in Block C, Hartley Business Park, Carrick-on-Shannon, www.wealthwise.ie All details and views contained within this article are for informational purposes only and does not constitute advice. Wealthwise Financial Planning makes no representations as to the accuracy, completeness or suitability of any information and will not be liable for any errors, omissions or any losses arising from its use. Wealthwise Financial Ltd T/A Wealthwise Financial Planning is Regulated by the central Bank of Ireland. #CI66141