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MOST people’s eyes glaze over if the topic of pensions is raised! Saving for retirement is extremely important. People are living longer and leading more active lives in retirement.
As a result, it is more important than ever for you to think about where your income will come from when you retire. Pension saving is one of the few areas where you can still get tax relief.
Unfortunately, only about half of the people working in Ireland are members of pension arrangements. Today let’s discuss a defined benefit pension.
What is a defined benefit pension scheme?
A defined benefit pension, or sometimes know as final salary pension, is a special type of workplace pension. Instead of building up a pension pot over time, it provides you with a guaranteed annual income for life, based on your final or average salary (hence the name).
DB pensions are most often provided by the public sector (health, education etc) and government employers. Some private sector employers do still offer them, however. Historically they have been seen as a very attractive kind of pension.
How does a DB pension work?
When you are a member of a DB / final salary pension scheme, your employer pays into a central fund on your behalf (unless your scheme is directly funded by the taxpayer). The scheme will assign you a ‘normal retirement age’, and your pension will be paid from this date. The amount you’re paid will depend on a number of factors.
What are the advantages of a defined benefit pension?
DB pensions are often seen as more generous, because it would take an above-average defined contribution (DC) pot to be able to buy an annuity that pays you the same amount as a DB scheme.
What’s more, the payouts from a DB pension are guaranteed for the rest of your life. So long as the pension scheme itself remains funded, your pension income will be paid no matter how long you live.
What are the drawbacks of a defined benefit pension?
Despite the attractions of a DB pension, in some ways it is not as flexible as a DC pension pot.
You can’t vary the income you take from it, nor draw out larger lump sums (apart from the tax-free lump sum offered by some final salary schemes). Also this kind of pension cannot be inherited by your beneficiaries. If you die prematurely, there may be a widow’s pension for your spouse, but most of the benefits will be lost, and nothing passes to your children.
If you have a defined benefit (DB) pension, you may be offered the option to transfer it into the more common type of pension (defined contribution). This is a big decision and an irreversible one, so it’s important to understand exactly what this means, and what the pros and cons for you might be.
Defined benefit/Final salary pension transfers – the pros and cons
What are the possible benefits and risks of transferring out of a defined benefit pension? Let’s compare them.
Advantages of transferring a final salary pension
• You can access your pension from an earlier age
• You can vary your income as you wish
• Unspent pension can be inherited by your beneficiaries, free of inheritance tax
• If the stock market performs well, you may end up with more money
• Your pension is not at risk if your former employer becomes insolvent
Disadvantages of transferring a final salary pension
• You’re trading a guaranteed income for pension pot that may run out
• Your pension pot will be vulnerable to stock market falls
• You will probably have to pay for advice on the transfer
• You will be responsible for managing your pension from now on
The best option for you will depend on how you personally weigh up these pros and cons. Everyone’s circumstances are different, so just because pension transfer worked for your colleague, doesn’t imply that it will work as well for you.
How a pension transfer works
Transferring a final salary pension can be a lengthy process. Not only do you need to weigh up the pros and cons, but you also need to decide on a suitable investment strategy for your money after it has been transferred to you.
Taking advice helps you to weigh up your long-term needs against your short-term plans, and may reveal benefits of your pension that you haven’t considered.
Check out the Pension Authority website for more details. www.pensionsauthority.ie
Carey Corbett Financial Services are available by phone, email, or personal meeting and happy to talk. Carey Corbett Financial Services are experts on personal and commercial insurance, pensions, investments, mortgages, protection and financial planning.
Call Tommy or Donal @ 065-689 3540 or email info@careycorbett.com
