Once an employee who is a member of a defined benefit pension leaves this employment, he/she has 2 options in relation to this pension. They are illustrated below:-
LEAVE IT WHERE IT IS – IN THE EX-EMPLOYERS PENSION SCHEME.
This deferred pension entitlement will be left in this scheme until the normal retirement age of the pension scheme and can only be accessed on this date (usually the employees 65th birthday). On drawdown of this pension the following entitlements crystalises
- A Tax-Free Lump Sum
- An Annual Pension income – payable for the rest of your life.
The lump sum is tax-free on the retirement date while the annual income is usually paid monthly and is taxable like any other income – liable for PAYE, PRSI (until age 66) and USC, etc.
On the death of the pension owner, 50% is usually paid to the surviving spouse until his/her end.
TAKE TRANSFER VALUE OFFER BY YOUR EX-EMPLOYER AND TRANSFER OUT OF THE PENSION SCHEME INTO ONE OF THE FOLLOWING:
A.Your new Occupation’s Pension Scheme
B. A PRSA
C. A Personal Retirement Bond (PRB)
The transfer value offered is usually a multiple of the annual pension entitlement from point 1 above. It can range from 10-25 times this figure.
Once a transfer value option is taken, the full fund value is then transferred to either a PRSA or a Personal Retirement Bond usually with one of the Pension Providers (Irish Life/Zurich/Aviva, etc).
The only real difference between a PRSA and a PRB is that you have the option to access/retire the pension from age 50 with the PRB.
It is rarely beneficial to transfer your pension to your occupational scheme with your new employer as your retirement age is restricted here also, in line with new scheme rules. You have limited control of where your funds are invested depending on the new scheme rules.
When you do decide to retire and access the funds from either a PRSA or a PRB, the funds are received as follows.
- 25% of the fund value is received as a tax-free lump sum
- The remaining 75%of the fund is then transferred into an Approved Retirement Fund (ARF).
The lump sum is received tax-free whereas the funds withdrawn from the ARF are taxable as income – Liable to PAYE, PRSI (until age 66), and USC.
This ARF income can be received monthly/quarterly or annually etc. A minimum withdrawal of 4% is compulsory from age 61, but you can withdraw as much as you wish from this pot of money at any time.
However, all withdrawals are taxable so it is prudent important to be when withdrawing this income to avoid paying unnecessary income tax, etc
Accessing your pension fund:
On death, the full fund value is left to the pension owner as an inheritance.
Public sector occupations employed by the Department of Education, HSE cannot take a transfer value for their pensions. However, most semi-state bodies can (Eircom, An Post, Banks, etc).
Deferred pension holders of such companies as Eircom, Intel, An Post, many Ulster Bank employees, Bank of Ireland, AIB, Ulster Bank, etc. have all been offered ‘Enhanced Transfer Values’ with this new draw-down pension option.
The transfer values offered to deferred Defined benefit pension holders are calculated by their ex- employers pension actuaries department. These values can go up and down over a period of time.
Whether or not this is the preferred option for you, there is absolutely no harm in requesting a transfer value from your employer to assess all of your options. You can then make an informed decision of what is the best option for you and your financial future.