25th May 2020
What happens my pension when I, you know!? I’m never one to shirk the hard questions, but it seems crass to talk of ‘you know’ while all of ‘this’ is going on!
If you are any of the following, you really ought to know about this:
“Life is like playing the violin in public and learning the instrument as one goes on”, or so said the 19th Century English author Samuel Butler. I’m including that quote for no other reason than I really like it. A friend of ours recently had a baby, and she is bouncing hundreds of questions off Fiona (who is an ‘old hand’ at this stage!). It just goes to show that we are all learning. None of us know everything – a valuable lesson in humility in times like these!
There is one very costly mistake that you really ought to be aware of – whether you do anything about it or not is your decision! The other way of looking at it, is that this is an opportunity that you may not have been aware of before. I see it a lot, and it’s generally a surprise to clients when they discover it, so here you go!
Happy Days – What Happens My Pension If I, You Know?!
You earn(ed) €70,000 Gross per year. You have saved and sacrificed salary over the years, and look at your pension pot values online; €800,000, with a sense of satisfaction. Of that, €70,000 of that was contributed by you as an Employee, the remainder was from the company.
You are 5 or 10 years away from actually drawing-down on that pot, but you know it’s there, a future income source. You have it invested in equity funds so have seen some incredible growth over the past 10 years.
You also are comforted in your assumption that if anything happened you (if you, you know!) your spouse will get the €800,000 lump sum, and will be well set, financially.
UnHappy Days – What Happens My Pension If I, You Know?!
The trouble is, your spouse, in this scenario will get four times your Gross Salary, plus the contributions you made as an employee (€350k), as a lump sum. The real issue here, for many many people with large multiples of salary of pension values, the trusteees MUST comply with Revenue rules, and use that balance to buy an annuity for your spouse. He/She does not get the entire pot as a tax free lump sum.
In this scenario, the cash lump pay out is €350k, and the majority of the pot, €450k is forced into being handed over to an insurance company to buy an annuity pension. While an annuity will provide a monthly income for as long as the spouse survives, the annutiy rate for someone of 50 years of age today is approx 2.5%.
Your spouse in this instance would get €11,250 per year, or €937 per month, taxable income, instead of a lump sum of €450,000, to do as he or she wished. Considering you had an €800,000 savings pot, this outcome is pretty awful, and totally avoidable. If you can manage to ‘preserve’ the benefits in your scheme, this issue largely disappears, and your spouse gets access to the full pot!
Preserve The Benefits In Your Pension Scheme? What Happens My Pension If I, You Know?!
There are several options to avoid this costly pensions rule. Indeed, avoiding this costly pensions rule is often only one of the reasons that some of these options may be a really good thing for you to do. The right option for you will require some thinking, planning and a proper analysis – don’t rush into a decision – and certainly don’t be pushed into one without understanding the implications for you. In no particular order
Change Employer: If you start working with another company, the benefits in the old scheme become ‘preserved’. If you are a director of a company, moving employment to another company as part of the group will not ‘preserve’ the pot – it must be another entity entirely
Transfer Value To A Personal Retirement Bond (PRB) aka Buy-Out-Bond (BOB): Probably the first solution to come out of most advisor’s toolbag. It is to most common, but not necessarily the most effective. There are instances where the PRB/BOB does not qualify for ‘preserving’ the pot in the eyes of Revenue. Also, it is very messy and often not possible to move to a PRSA or other schemes if you move to a PRB/BOB. Some advisors will push to PRB/BOB on the promise of ‘extra allocations’ (free money!) – but like most things that are too good to be true….
Take Your Lump Sum: The most fun option! If you start drawing down your pension benefits they are immediately exempt from being forced down the dreaded annuity route (unless of course you chose an annuity!). If you subsequently, you know, your spouse will get access to the full pot. See Podcast 175 with Paul Kenny, all about ensuring that this is done correctly.
Transfer To A PRSA(s): If you, you know, and funds are in a PRSA, the entire pot goes to your spouse as a lump sum. A great thing about having the funds in a PRSA is that, if you wished, you can leave the PRSA untouched until 75 years of age. You don’t have to take it if you don’t need it before then. Also, you can split your pot into multiple PRSAs, allowing you to access various ‘portions’ at staggered times; drawing your retirement income in an uber-tax efficient manner!
In order to do this easily, you need to have less than 15 years’ pensionable service. In other words, within 15 years from the date first pension contributions were made on your behalf in that employment scheme. This option is deserved of a Blog of it’s own – good idea!
Conclusion – What Happens My Company Pension If I, You Know?!
The options here look and sound fairly straight-forward. There are however considerations and aspects to everyone’s situation that need to be given due care to ensure the decision is the optimal one. Far too often people end up in PRB/BOBs when another route may have been the better option for people.
We’ll revisit this topic again soon to try and get the message out, and help more folks to avoid some costly mistakes, for when they finally play that last violin for you, when you, you know!
Paddy Delaney QFA RPA APA
Maximising ARF Income – Blog 120
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