I recently found myself at the receiving end of my own financial advice
I received a letter from the trustees of my permanent tsb bank pension scheme. The letter stated that the bank had informed the trustees that they would make no further contributions to the scheme after the end of June. This, inevitably, will lead to the winding up of the pension scheme.
I am a deferred member of this scheme, having left the bank in March 2010. At the time I was given an option to transfer my benefit to an alternative arrangement. After much deliberation, I had decided to leave it in the scheme – admittedly the easy option at the time.
Hindsight is a wonderful thing
The reason for my inaction? I could have taken the transfer value, which effectively was an estimate (minus a discount) of my contributions, plus the bank’s contributions, during my time there. My transfer value was €120,000, which I could have elected to have transferred to a defined contribution scheme in my own name, in the form of a buy-out-bond or personal retirement bond. At retirement, it would have been up to me to take my fund and find the highest annuity rate the insurance companies were offering to secure the best pension – an annuity rate is like an annual interest rate, but guaranteed for the rest of your life.
Or, I could have remained in the defined benefit scheme, and been “entitled to” a pension at retirement of €18,000 per annum for the rest of my life.
Naively, I balanced one against the other. To get a pension of €18,000 from an investment bond would require a fund at retirement of approximately €520,000 and an annuity rate of 3.5%. Therefore I would have to make my investment bond of €120,000 grow to €520,000 by retirement in 17 years. This would require a growth rate of around 9% p.a. You can kind of see why I stubbornly stuck with the defined benefit scheme.
But, in hindsight, it was a crazy comparison as the golden promise of defined benefit was quickly turning to an empty one. I wonder now, had I gone to a financial adviser at the time, would he or she have made me see that my €18,000 a year was becoming a pipe dream?
This letter finally put an end to the dream of defined benefit schemes, pipe or otherwise, and I find myself, once again, having to make a big decision about my retirement plans.
Questions, questions, questions
What do they mean by wind up anyway?
Winding up means that the “preferred creditors” are paid first. What is left in the pot after winding-up expenses are deducted is divided among existing employees and deferred members (like me) equally. The preferred creditors are all Additional Voluntary Contributions (AVCs) and existing pensioners in receipt of pensions. My share of the leftovers would then be transferred to a defined contribution scheme in my own name (aka a buy-out-bond, personal retirement bond or PRSA).
Luckily for me, I have recently completed the Graduate Diploma in Financial Planning and spent over 20 years in the financial services industry. However if I was in a different industry, I don’t know how I could possibly be expected to navigate the murky waters of pension wind-ups and defined benefit schemes.
So once more I am facing a few questions:
What does it do to my retirement plans?
Well, I have accepted that my potential annual pension on retirement of €18,000 pa is well and truly a thing of the past. I now will have to take charge of my own retirement by making best use of the fund assigned to me.
Do I take the fund now or wait until the fund winds up?
I have requested a transfer value, which I expect will be discounted by up to 35%, based on the recent valuations of those members who left employment in December 2012. My transfer value will be calculated by an actuary. Whatever the transfer value now, there is a chance that it could be worth more when all the calculations are done after the wind up. But the more likely scenario is that it could be worth less, after assets are realised, AVCs and existing pensioners taken care of and wind-up costs deducted.. The company is not pumping any more cash into this sinking ship. At this stage I am leaning towards the view that a bird in the hand now is better than a bad egg in a few months’ time. I think I’ll take the money and run.
What can I do with my share of the remaining pension pot?
I certainly can’t leave my pension in the old TSB pension scheme. My choices as regards what to do with my fund are governed by pension rules. I could:
A) Transfer to a Buy-out Bond or Personal Retirement Bond. The advantage of this option is that I would have access to the fund from the age of 50. And the rules of the old Occupation Pension Scheme carry to the buy-out bond in relation to tax-free lump sums
B) Transfer to a new Occupational Pension Scheme
C) If I had less than 15 years’ service with permanent tsb (which I didn’t), I could have transferred the fund to a PRSA. This option allows a tax-free lump sum at retirement of 25% of fund, and other investment options
These options may not guarantee an income in retirement anywhere close to the false promise of the defined benefit scheme. Rather than retreat to sandy area for a bout of head-burying, or spend an unhealthy amount of time engaging in teeth-grinding and gnashing, I need to start working on it now to make the best of what I have.
The moral of my story
Don’t let difficult decisions lead to inaction.
If you are in a similar situation to me, do not be put off by the pension jargon and pension rules. If it all seems too complicated, take advice from people who will take the time to fully understand your personal circumstances and offer you the best advice. Take action by contacting someone who can help you. And take control of your own retirement planning.