Pension decision ARF v Defined Benefit (Annuity Pension)

DFS UTD · 11-11-2021 12:32am #1

Hi All

Like its says in the title, I'm coming close to pension drawing my pension, just doing some research as to the best options going forward. For years I just assumed I would be drawing on my defined benefit pension (private sector), but some people are saying to me that it would be better to invest the pension fund into an ARF....

Any opinions..

endacl · 11-11-2021 1:24am

Are the people who are advising you qualified people, or people you met in the pub? Talk to a reputable advisor. A DB pension is quite a prize, depending on the benefit that's defined.

coylemj · 11-11-2021 1:53am

https://www.boards.ie/discussion/comment/118149135#Comment_118149135

More to the point, are they people who will take a slice of the action (c. 2%) if the OP converts his pension to a lump sum and bungs it into an ARF?

Independent advice should always be sought but the overriding reason for not converting a DB pension to a lump sum is that you risk drawing down your money until there's nothing left in the pot.

endacl · 11-11-2021 2:07am

https://www.boards.ie/discussion/comment/118149164#Comment_118149164

Good point. How's your health OP? A DB pension will still be a DB pension if you live till 120.

Parkender · 11-11-2021 5:58am

ARF = flexible income, DB = guaranteed income. If you have other assets to lean on in retirement for flexible income needs then less likely it will be that you need to alter your DB. Thats a starting point……you need to assess security of DB, value v market etc. In other words a lot more advice required than you’ll get on here unfortunately.

DFS UTD · 11-11-2021 9:31am

Thanks for the comments. Regarding the people I mentioned - they have recently retired from same job and both took the ARF option with the 25% tax free lump sum.

I've been paying AVC’s for a number of years so the pension pot should be decent.

the 25% tax free lump sum would be higher than the 1.5 times final salary (re terms of DB scheme).

also the final DB pension would be lower than arf with yearly drawdown 5.25%. Understand that ARF is a riskier option with market volitility - but a yearly return of c. 5% seem reasonable over a long term even with market ups and downs ?

regards my health - I don’t have plans to exit anytime soon - but sure you never know - though living to 120 is pushing it 🤭

JimmyVik · 11-11-2021 9:52am

In the current rates environment people would be made to take an annuity over an ARF. But like posted above. Pay careful attention to the charges.

Also with an ARF you anything left after you croak will go to your family, minus tax of course.

Get hard figures on how much you will be getting on an annuity vs how much you will be getting on an ARF.

Assume you will live til 85 or 90 for the ARF.

namloc1980 · 11-11-2021 10:14am

Personally I'd go for an ARF. Losing your pension pot for an annuity income is not attractive to me and annuity rates are scandalous also. But if you don't care about that and just want to ensure a guaranteed income for the rest of your life with no investment risk or worries, then an annuity is the way to go.

Get advice but even then be wary as the advisor is also potentially looking for a slice of the action.

gypsy79 · 11-11-2021 10:21am

https://www.boards.ie/discussion/comment/118149879#Comment_118149879

If he has a DB pension then annuity rates most likely don't matter so probably dont give advice if you dont understand

Annuity rates are a function of projected interest rates, which are low hence giving "scandalous" rates

Most advisors are disgracefully underqualified to offer advice in my experience. I am an actuary and misfortune of dealing with them in my career. People give out about insurance companies when the truth is a broker makes a bigger cut than the actual insurance company

Jim2007 · 11-11-2021 10:38am

https://www.boards.ie/discussion/comment/118149650#Comment_118149650

You need to be extremely careful about who you take advice on this topic because the majority of people are clueless when it comes to financial comparisons.

fFor example most of the draw down calculations I have to some extent or another relied on replenishment rates that have failed to occur and some people are facing the very real possibility of running out of money.

A DBP is a guaranteed income for life and not something to give up lightly based on what your mates think or do.

Go and get proper financial advice before you do anything.

JimmyAlfonso · 11-11-2021 10:50am

I am in a similar role to gypsy and agree entirely. If you have no immediate need for a lump sum leave the pension alone. Your DB pension will be greater than any annuity you purchase.

Do seek independent fee based advice only from a pension specialist. If you rock up to a pension advisor they may/undoubtedly will try to get their fee by making you purchase a product to get their commission and show you any projection that suits the occasion.

Your current health is also a factor. If you feel you are in good health then like many you can expect to live to mid 80's so you're looking at 20 years of DB whereas the lump sum may only assume 10-12 years.

A short-sighted element which is in my opinion misguided is that you're DB will be subject to tax whereas your lump sum will be tax free up to your allowance and many people think they are winning by taking this option when they will have to live the rest of their lives with little of no DB left after taking the lump sum to top up state pension.

There's a reason DB largely doesn't exist anymore to new entrants, it costs too much to fund so that should be a fair indicator that what you have is the most favourable product available.

Henry Ford III · 11-11-2021 11:52am

https://www.boards.ie/discussion/comment/118149164#Comment_118149164

Where did you get the 2% figure from? The charging structure of these products can be varied enormously, including 0% commission if it's being done on a fee basis.

p.s. In an application for P.I. cover brokers were asked had they ever advised anyone convert d.b. benefits to ARF's. It's a big red flag for an insurer. There's plenty of good reasons why.

Henry Ford III · 11-11-2021 12:02pm

https://www.boards.ie/discussion/comment/118149743#Comment_118149743

How would you know how much you'll be getting from an ARF? It's an active investment product with no guarantees after all. You can set a level of drawdown, but there's a risk that the ARF might be going backwards in value if the assets aren't at least matching that level of drawdown.

p.s. There's also the potential thorny issue of deemed distribution.

coylemj · 11-11-2021 12:21pm

Thanks for the comments. Regarding the people I mentioned - they have recently retired from same job and both took the ARF option with the 25% tax free lump sum.

Any fund out there that has an exposure to equities (shares) is currently showing a very profitable return over the past few years. Which means that it's very easy to paint a rosy picture of how an ARF will outperform the pension you'd get if you left the money in the fund. But remember that you will be in control of the money and you could easily make bad decisions. Especially if there's a stock market crash and, in a panic, you start moving from fund to fund in an effort to make up losses. Which is almost always a recipe for disaster.

also the final DB pension would be lower than arf with yearly drawdown 5.25%. Understand that ARF is a riskier option with market volitility - but a yearly return of c. 5% seem reasonable over a long term even with market ups and downs ?

5% p.a. would be a reasonable expectation if you were in your 30s, well off retirement age and had your money in a pension fund that was heavily geared to equities (shares). With more than 10 years to retirement, a young person can safely ride out any stock markets crashes. Because the markets always bounce back. But as soon as you retire, you won't be in that situation. You will, of necessity, have to be a lot more risk averse.

After you retire, you will be relying on that fund to provide you with an income for the rest of your life so you have to take a much more conservative view on where you put your money. For you, I think 3% p.a. would be a more realistic target to aim for. Looking to achieve a long term return of 5% p.a. means that you will have to take risks that you may later regret.

namloc1980 · 11-11-2021 12:41pm

https://www.boards.ie/discussion/comment/118149930#Comment_118149930

How do you know they don't matter? The OP said they are making AVCs as well wherein annuity rates certainly would matter if they are looking to convert that to an annuity. Maybe you should take your own advice.

JimmyVik · 11-11-2021 3:01pm

https://www.boards.ie/discussion/comment/118150689#Comment_118150689

The actuary missed that :)

coylemj · 11-11-2021 4:18pm

https://www.boards.ie/discussion/comment/118150456#Comment_118150456

I got the 2% from an ARF transaction of which I have firsthand knowledge. The broker was approached by an individual with a lump sum and told which fund the money was to be invested in - no advice was sought or given. The broker said his commission was 2% and he would waive half of it so he got 1% and the client got a 101% allocation.

Henry Ford III · 11-11-2021 4:41pm

https://www.boards.ie/discussion/comment/118151854#Comment_118151854

So that was a 1% charge then.

In any event there's no benefit in pointing to 1 case of which you have supposed "firsthand knowledge" as a norm, because it isn't. I've done dozens of ARFs (most likely hundreds) and your 2% figure isn't standard.

Jim2007 · 11-11-2021 6:33pm

https://www.boards.ie/discussion/comment/118151979#Comment_118151979

I have never done a single one, but I have been involved in the designed of software to do fee validation for such products and while 2% is definitely possible, it is not that common. Also, fees and commissions are not always one to one with a given product. White branded or not, most intermediaries want to encourage the agents/advisors to do as much business with them as possible so fee structures can be more complex.

DFS UTD · 12-11-2021 8:26am

Thanks all for your comments.

I’m a year and a bit out from having to make the choice.

will deffo look for independent advice - but lots to ponder in the meantime 🤔

BR

DFS

12-11-2021 9:26am

https://www.boards.ie/discussion/comment/118149930#Comment_118149930

Commissions are paid to intermediaries out of what the insurance companies deduct from the clients pension policy. Actuaries set the 'prices'.

Can you provide an example of where the fees and charges deducted by the pension provider are less than the 'cut' a broker may take for an annuity or an ARF?

coylemj · 12-11-2021 11:59am

https://www.boards.ie/discussion/comment/118152618#Comment_118152618

OK, so if 2% 'is not that common', what is a typical charge for setting up an ARF as a standalone exercise i.e. no other financial products involved?

Henry Ford III · 12-11-2021 10:58pm

Every case is different so there's no typical charge. It could be fee based, or commission based or offset.

How long is a piece of string?

The J Stands for Jay · 15-11-2021 1:10pm

https://www.boards.ie/discussion/comment/118149650#Comment_118149650

Since you have paid AVCs, you'd be able to keep the DB and pit the AVC into an ARF. You could also take the lump sum from the DB scheme and use the AVCs to bring the tax free lump sum up to 25%. You'd get the best of both that way (assuming the DB scheme is financially secure).

DFS UTD · 16-11-2021 6:14pm

https://www.boards.ie/discussion/comment/118169286#Comment_118169286

Thanks, Jay - so my defined benefit scheme allows me to draw 1.5 times final sal tax-free. If I go the ARF route (i.e. transfer the value of my defined-benefit + plus my AVC value to an ARF) I can get 25% of the value tax-free. Are you saying I can do both? (i.e draw 1.5 times final sal from my defined benefit scheme (and keep defined benefit pension), plus draw 25% of my AVC's (and put the remaining AVC value in an ARF). Both tax-free assuming under the threshold of 200k?

The J Stands for Jay · 16-11-2021 7:09pm

https://www.boards.ie/discussion/comment/118176724#Comment_118176724

Assuming your DB is worth 20k a year, your salary is 30k and your AVC fund is 90k.

The DB scheme will allow you to convert some of the pension into a lump sum, up to 1.5 times your salary. That would give 35k of a lump sum. You can choose to take that lump sum from your AVC fund instead, and keep the full DB pension intact. The balance of the AVC could go to an annuity or an ARF.

The point I was getting at, is that you are allowed, as an alternative, to take 25% of your fund as a lump sum. To do this, a capitalisation factor is used to get a value for your DB pension. The factors supplied by Revenue are 20 times, and higher. Your fund would then be DB x factor + AVC = 20k X 20 + 90k = 490k. That means you could have a lump sum of 122k. The DB scheme would give you 35k (plus a reduced pension each year) and you'd then be able to take 87k from the AVC with the rest of the AVC going to an ARF or annuity.

monseiur · 17-11-2021 11:19am

Hi all,

Hope the OP doesn't mind if I piggy back on here for a minute.

My aunt is 62, single, has over 40 years service in a semi state company and is in a DB pension scheme (Cornmarket)

She is considering retiring next March /April. She is entitled to a lump sum plus a monthly pension of €2,085.00 (gross). She's clueless about the whole pension system and how it works and getting good independent info. is not easy.

Is it too late in the day for her now to pay AVC's etc. Should she take the lump sum now or invest it with one of the Cornmarket low risk funds or elsewhere considering that bank interest rates at zero ?

Any other advice would be greatly appreciated. Thanks.

Henry Ford III · 17-11-2021 12:39pm

She should consult with Cornmarket I'd suggest.

40 years service may see her at maximum benefits. There may be non pensionable income but nobody here can identify that.

Investing the lump sum may be a good idea, but depends totally on her overall financial position.

The J Stands for Jay · 18-11-2021 11:27am

https://www.boards.ie/discussion/comment/118180301#Comment_118180301

Make sure you get a good advisor, there's been a few who have made mistakes and their clients have ended up with an annuity or ARF when they were expecting a cash lump sum.

Pension decision ARF v Defined Benefit (Annuity Pension)

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