Pension Fund - If unemployed at age 60 can it be paid out?

lesnic

If a person were to become unemployed at age 60 what is the position regarding payout of a private pension fund?

eagle_i

You can draw down retirement benefits from age of 60 onwards (there are rules which allow retirement from age 50). You have an entitlement to a tax free lump sum (TFLS). The TFLS amount depends on whether you were a member of an employer sponsored pension scheme, or you were contributing to a personal pension plan(PPP)/PRSA. If you were in an employer’s pension scheme then your max TFLS entitlement is 1.5 times your final salary based upon 20 years or more service with that employer, the balance of the fund is used to purchase your pension. If your service is less than 20 years, there is a scaled back entitlement based upon the number of years you worked with the company. (Note: Where you transferred funds from a previous employer’s pension scheme to your last employer’s pension scheme, you are viewed to have had continuous service eg. You worked with company X for 16 years, moved to company Y and worked there for 6 years. Provided you moved your pension from Company X scheme to Company Y’s Scheme while you were employed with Company Y, for pension purposes you are viewed to have had 22 years continuous service ie. 16yrs + 6yrs).

If your contract is a PPP/PRSA, your TFLS entitlement is a maximum 25% of the fund with the balance either used to purchase a pension for your life time, or reinvested under the AMRF/ARF (Approved Minimum Retirement Fund/Approved Retirement Fund) rules.

Taking retirement benefits at any age is a big step, and should not be taken solely on the chance of getting your hands on tax free cash. You will need to make some big decisions on what type of pension to go for, whether you want the pension guaranteed 5 years or perhaps more, spouses death in retirement pension, indexation etc..., or do you go the AMRF/ARF route, assuming you qualify. Any one of these decisions has an impact on how your pension is going to be paid for the remainder of your life, therefore in my view you should take the following steps:

1. If you were a member of an employer’s pension scheme, contact the consultant/administrator of that scheme and request your early retirement options. If it is a PPP/PRSA you have contact the consultant/insurance company you took the plan out with and again ask for your early retirement options.

2. Most importantly....Get Advice, either from the consultants of your previous employer’s pensions scheme (that is what they are there for) and/or from an independent pensions consultant. Only then can you make an informed decision.

lesnic

Thank you for the prompt and comprehensive reply!

lesnic

Eagle_i,
I am unhappy with my present company's pension scheme's charges of 3% on contributions, just for managing a cash fund. I have two small pensions from previous companies which I did not transfer in. It seems it would be sensible to consolidate them, giving me around 10 years' continuous service. Is it allowed to charge for transferring in pervious pensions?

eagle_i

Lesnic, are you sure it is 3% annual management charge (AMC)? That to me seems very excessive! In fact to my knowledge I’ve not come across 3% AMC (not in recent years), at most 2.5% but this was for a specialist fund.

Just to explain the general charging structure on group pension schemes can vary from one company to another, and also from one pension scheme to another, but in general the structure used is the same. Charges are taken in a mix of Entry Charge, Annual Management Charge, Policy/Membership Fee and Pension Board Fee.

1. Entry Charge, this is the charge on your regular monthly/annual contributions going into the scheme. It can range from 0% to 5% (this charge is not capped at 5% unlike Standard PRSAs, but it’ll be unusual to be anymore than that), therefore if the entry charge is 5%(3%) every €100 you pay into the scheme €5(€3) is charged (i.e. €95(€97) is invested).

2. Annual Management Charge is a charge that is applied to all the monies under investment within the scheme (ie. the accumulative value of the member’s monies invested). This charge can be as low as 0.5% (or even lower), usually the more monies within a scheme a better AMC can be negotiate. Higher AMC’s are usually applied where one is investing in a specialist fund with an external investment manager and could perhaps be as high as 2.5%.

3. Policy/Membership Fee, this can be a monthly charge anywhere from €1.50p.m. onwards. I’ve come across an unnamed Irish bank charging €13.50 p.m! But in my experience most companies are moving away from this form of charge. From experience most schemes have no more than €4.5p.m. membership charge - apart from that bank!

4. Pensions Board Fee (this goes directly to the Pensions Board), which is a set annual fee paid by each member, it used to be €9.50p.a. I think this was changed over the last year or so to around €8.90p.a. Perhaps someone will correct me on this? In any event most providers are now waiving this fee.

The above is just a general guide to how charges are applied to regular contributions within a scheme, as said this can vary from one company to another, and from one pension scheme to another.

Entry charges on single premiums/transfer values can be the same as the entry charge on regular contributions as described above. However, usually there is a lower entry charge on single premiums and a Nil entry charge in respect transfers from another occupation pension plan. Really, it all comes down to the charge structure of your employer’s pension scheme. The 3% you mentioned above I feel is the entry charge, perhaps I am wrong but the only way of knowing is talking with the pension consultant/provider for your employer’s pension scheme.

With regard to transferring your other retained benefits to your current employer’s scheme, first off request a ‘Leaving Service Options Statement’ from each of the scheme consultants/administrators. That will set out the transfer value available to you and the procedure in transferring the monies. Also, if any of the previous employer’s pension scheme was a ‘Defined Benefit’ arrangement then get advice before you transfer as it may be more beneficial to you to retain the funds in that scheme. In fact seek advice before transferring any of the funds. It is probably best to deal with consultant on your current employer’s pension scheme as they will be familiar with the scheme and whether it can accept transfer values. Also you will not be charged for that advice.

Sorry there is alot in the above, I tried to keep it simple. As I said, talk to your employer’s pension consultant.

lesnic

Eagle_i,
thank you again for the helpful reply. What I was complaining about with my fund is the Entry Charge. In additon to all the other annual charges the idea that a fund which manages cash can charge €3 out of every €100 paid in ( in my case €58.50 out of €1,950 monthly) to "manage" a fund paying 1% annual interest annually staggers me.
If I could put it in a piggy bank paying no interest I'd be much better off.
Am I wrong in thinking like this?

eagle_i

First off to answer your question, yes you are wrong in thinking that way! True, if you were to put your money in a piggy bank (with/without a government guarantee), of course you will not incur any charge on your money going in, or any charge on your money staying there! However, apart from your money loosing value as it will not even keep pace with inflation, what you are forgetting is when you pay into a pension contract you have full PAYE and PRSI relief on that money to the tune of almost 47% at the top end of the tax rate. Therefore for every €100 you pay, it is really only costing you €53, the other €47 is paid by good old Mr & Mrs (gotta be pc these days) Revenue.

Now I’m not trying to justify any of the charges but you need to keep this in perspective, the entry charge while it is a pain, in essence it is a once off charge as the money is going into the plan. It is not a charge to manage your investment, the simplest way of putting it; it is a charge for the day to day running of the scheme (ie. applying the contributions to member accounts, keeping detailed records, dealing with member queries, leaving service options, issue of annual benefit statements etc...).

The annual management charge is the charge in respect of investing your monies and managing that investment. You mentioned your monies are currently invested in a cash fund, yes in this instance 1% AMC just to invest in a cash fund seems excessive. However, it is in not like you have the money locked into a deposit account for a specific period, you essentially have the money in a demand account and can switch it to another fund at a moment’s notice. Yes, we all like to see the investment managers work for their money, and keeping the money in a cash fund is making it easy for them. I appreciate at 60 you are not far off retirement and need to be prudent with your retirement fund. I’d suggest you talk with the advisers to your employer’s plan about other safe investment options/strategy.

A final point, where you are a member of a group pension scheme the charging structure negotiated is for the group as a whole. The Trustees cannot treat any one member any different to the next, which includes those making high contributions to the scheme and those with low contributions. In this regard there is an element of cross subsidisation by the higher contributors to achieve a more favourable charging structure for the group.

I know the above does not ease you annoyance regarding the charge structure, the only thing you can do is contact (best to do it in writing, where you will get a reply in writing) the scheme trustees and ask when the last scheme charge structure was last reviewed and how competitive is the current charge structure to what was available on the market then and now?

Kennie1

lesnic wrote: »

If a person were to become unemployed at age 60 what is the position regarding payout of a private pension fund?

You really need to speak to a Financial Advisor regarding the draw down of a personal pension, this is a very complex area and there is a lot of factors to consider. Should I transfer the fund to a PRSA to avoid the need to set up a AMRF/ARF and also avoid Imputted distribution tax. Getting a lower annuity rate because retiring 5 years early. How will tax free lump-sum this affect my social welfare entilitements and the list goes on.

My advice is go get the info and then post the advice you got before you act on the advice. Eagle-i has provided you with good info here but you must realise that this is general info and each person's objectives is different.

By the way is all the contribution going into the Company Pension or is it split between the Main scheme and a AVC and it so did you take out the AVC through the employer or through a broker?

eagle_i

Totally agree Kennie, anyone looking at pensions and retirement needs professional advice. Pensions by their nature are complex, it really is not just a matter of setting up a plan (be it a personal plan or corporate) and throwing money at it. That is just the start, it really is important to get advice from a pension consultant (rather than your best buddy down the pub or even here on the boards), especially when you are nearing retirement. As I said above anyone of the decisions you make regarding your pension has an impact on how it will be paid to you for the remainder of your life.

Perhaps I should had stressed it more in my previous posts, but the info outlined is very general. I've kept it to a minimum in order not to cause almighty confusion. The basis of my advice very much assumes that you're an employee (ie. a non-director with no share holding in the company).

lesnic

I am grateful for the advice from you all.
Kennie, the contribution is going into my company pension scheme in the form of the main scheme plus an AVC. There is no broker involved in the AVC.
I am currently awaiting a reply from the scheme on the costs of paying in from 2 previous schemes. I'll post when I get the info.
Am I correct in thinking that AVCs and normal contributions are treated differently? I would be interested in the treatment of a group scheme member as opposed to the holder of a PP/PRSA.
Thanks in advance.

lesnic

I have just heard back from my company group scheme. There is no change for the transfer in from previous schemes.

eagle_i

lesnic wrote: »

I am grateful for the advice from you all.
Kennie, the contribution is going into my company pension scheme in the form of the main scheme plus an AVC. There is no broker involved in the AVC.
I am currently awaiting a reply from the scheme on the costs of paying in from 2 previous schemes. I'll post when I get the info.
Am I correct in thinking that AVCs and normal contributions are treated differently? I would be interested in the treatment of a group scheme member as opposed to the holder of a PP/PRSA.
Thanks in advance.

Lesnic, I'm not surprised you are confused. Best thing to do is sit down with the advisor of your current employer's pension scheme, they will outline all your investment and retirement options. This is much easier to do in face to face meeting where the adviser has full details of your financial position and an idea of what you are trying to achieve. Armed with that information the adviser can set out a plan to achieve your goals, or perhaps tell you that it is not possible to achieve what you want, but give you a more realistic approach to achieving a suitable finanical solution.

Getting back to your AVC question, yes you are correct AVC's are treated differently in that you have the additional option of going the AMRF/ARF route. You can still decide to purchase a pension in the same way as you will with the value of your standard employer/employee contributions. Ultimately you need proper advice, this is your future income you are dealing with and it is best to get advice. If you are not happy with the adviser to your employer's pension scheme, you have the option of getting the advice from an independent adviser. It will cost you to get that independent advice, but for piece of mind it could be money well spent.

lesnic

I will make an appointment with the comany pension adviser and report back.

Kennie1

By the way is all the contribution going into the Company Pension or is it split between the Main scheme and a AVC and it so did you take out the AVC through the employer or through a broker?[/QUOTE]

Reason why I asked this is because if you have an employer AVC this AVC is goverened by the rules of the main scheme which usually sets out the max TFLS you can draw down per years service completed with current employer (3/80th per years service to max 120/80 which is 40 years service ie 150% of final average salary within a set period over last 10 years usually. As if it were an independant you can opt for the revenue upscaled TFLS which would mean if you had min 20 years service you could get full 150% salary.

Next thing you need to do is get a transfer value from your previous employer scheme. If they are final salary (DB) scheme's it would be only in extreme cases a good idea to transfer out to your current employer scheme as the about 90% of DB schemes are not fully funded, this would mean that the value of your benefits would have to be written down in value. Also it would be impossible to get an annuity (pension for life) rate as good as a final salary scheme in todays market. One of the only time's it is a good idea to transfer out of a DB scheme is seriously underfunded and the lightlyhood of the employer not being able to address the underfunding.

Go to a Financial Advisor that advices for an upfront fee rather than one who works on a commision basis This fee is usually around 250 euro but it is money that is well spent!