Wednesday 23 August 2017

Is a personal retirement bond a good idea?

 

Email your questions to lmcbride@independent.ie or write to ‘Your Questions, Sunday Independent Business, 27-32 Talbot Street, Dublin 1’.
Email your questions to lmcbride@independent.ie or write to ‘Your Questions, Sunday Independent Business, 27-32 Talbot Street, Dublin 1’.

Trevor Booth: Head of personal financial planning at Mercer

Q My defined benefit pension scheme is winding up and I have been given an option of transferring the money in my pension to a Personal Retirement Bond. Is this a good idea and what should I know before transferring my money into such a bond? Will I have to go down the annuity route when I retire if I move my money into a Personal Retirement Bond now - or will I also have the option of an ARF on retirement? I'm 50 years old now. Pauline, Clontarf, Dublin 3

From your question, it sounds like the trustees have given you the option of transferring your pension either to the default arrangement or to a different pension scheme. The trustees will usually provide a default arrangement that can accept members' funds on the wind-up of a scheme. This is often a Personal Retirement Bond (PRB) and, due to the relatively large number of individuals transferring, it regularly provides more competitive terms than would be available to you as an individual in the market.

Typically, the default PRB will be used for those without a current scheme to transfer to - or who cannot be contacted. However, it can also be a sensible option for other members. The main point is that you need to compare the PRB with the alternatives available to you.

If you are a member of another pension scheme, you could transfer to that arrangement. If you have been in a defined benefit (DB) scheme for under 15 years, you can transfer to a personal retirement savings account (PRSA).

There are a number of factors to bear in mind when comparing a PRB with other pension arrangements. They include the charges (namely the annual management charge, policy fees and any encashment penalty applicable if you retire or transfer your funds from that arrangement); the investment choices provided (such as the availability of lifestyle options and a broad investment range); and the benefit options available after transferring - for example, when you can draw your pension and what tax-free lump sum you can draw from the different arrangements.

If you transfer to the PRB, you will be able to access an ARF or annuity at retirement. Before June 22, 2016, the ARF option was not available for transfers from a DB scheme, except for additional voluntary contributions.

If you would have been eligible to take a tax-free lump sum at retirement from the DB scheme, you can take a tax-free lump sum from the PRB. You can take up to 25pc of the PRB's value as your lump sum when you retire and place the balance in an ARF. The alternative is that you can take a lump sum based on your service and earnings with that employer and use the balance to purchase an annuity.

Given that you are aged 50, if you have left the employment at which you built up your DB pension, you can draw benefits immediately after transferring to the PRB. In contrast, if you transfer to your current pension scheme, you will have to wait until you leave or retire from your current employment to draw benefits.

As part of the wind-up, the trustees may offer access to one-to-one financial advice. You should avail of this and ask your adviser to compare the different arrangements on their merits for your situation.

Claiming pensions tax relief

Q I'm self-employed and I file my own tax returns. I started a PRSA last year. How do I claim pensions tax relief on my pension contributions? John, Glasnevin, Dublin 9

Tax relief on your pension contributions is claimed through your Self-Assessment (Form 11) tax return for the 2016 tax year. You can claim relief on contributions made last year to your PRSA. You can also claim relief on contributions made since January 1, 2017 in respect of the prior tax year, provided those contributions have been made before submitting your tax return.

A section of Form 11 deals with PRSA contributions. The "Guide to Completing 2016 Pay & File Self-Assessment Returns", available on www.revenue.ie, gives a good explanation of how to complete this form. When completing your return, you will also need to have the PRSA 1 Certificate from your PRSA provider.

Making up for cut in pension

Q I've been working for the same company for the last 30 years and it is now winding up its defined benefit (DB) scheme. I have been a member of that scheme for 30 years. The company has chopped the benefits that people can now get from the DB scheme - and so my DB pension will now be half of what I expected it to be. I am in my mid-fifties and have no other pension. I need to do something now to make up for the big drop in the pension that I had been expecting. What's the best way for me to boost the pension income I can get when I retire? Robert, Dundrum, Dublin 16

The best way to boost your pension income is to make contributions to a new pension arrangement. Assuming that your new pension will be defined contribution (DC), your pension savings will be ringfenced for your use, so the more contributions you pay in, the higher your fund and resulting pension income should be.

Although you could set up your own personal arrangement, your employer must provide access to a pension arrangement after the DB scheme closes. There are often very good reasons for joining an employer's scheme: your employer may make contributions to your fund; they may provide life assurance with the pension; or they may have negotiated lower charges than you could achieve with a personal arrangement. Any one of these reasons could make joining your employer's pension scheme a good starting point for building up future pension.

Some employers will pay in more if you pay above the minimum contribution amount - that is, the more you pay in, the more they pay. If that is the case with your employer, it is worth increasing your contribution, so that you avail of the maximum contribution your employer will pay.

You can make extra contributions on top of those your employer's pension typically mandates. There are age-related restrictions but the limit is quite high. You can pay up to 30pc of your earnings in the current tax year, with contributions capped at €34,500 if you are aged between 50 and 55. The administrator of your new pension arrangement should be able to tell you what your maximum contribution amount would be.

If you can afford it, you could even backdate a contribution to the last tax year to increase your funds, provided you do this and claim the tax rebate before the tax return deadline of October 31 (or November 10 if making your return through Revenue's Online Service).

Bear in mind that contributions to a pension plan will receive tax relief at your marginal rate of tax. For example, if you are a higher-rate taxpayer, a contribution of €100 per month into your pension plan will cost you only €60.

As your current DB scheme is winding up, there will also be an amount transferred from that scheme that could help start your new pension fund.

The growth of your retirement account will depend not only on the contributions going in but also on the investment return achieved. The higher the target return on your investment choice, the higher the risk you will likely be exposed to, so you will need to strike a balance between the investment risk of your pension fund and the return you are seeking.

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