Pension Advice

The pre-retirement phase of Pension planning is all about building a savings pot for your retirement. When you are no longer willing or able to continue working, you will need to have savings from income earned in your working years.  

Yes, the State Pension is currently €248 per week or €12,900 p.a. and that’s a welcome payment. But you need to build your own savings pot to increase the household income after you retire.

The good news is that the State helps you to save for your pension. When you put €1,000 into your pension the state refunds you the income tax paid on this money, which can be 20% or 40%. The relevant tax break can be described as the tax you would have paid had you not put the money into your pension.

Defined benefit (DB) pension schemes were originally created to provide retired employees with a monthly payment for life. That payment was based on the employees’ level of service and a percentage of salary. So, after 40 years of service an employee would get a pension up to two-thirds of their salary.

So why the decline of DB schemes

Firstly, we are living a lot longer, according to the Central Statistics Office life expectancy in 2012 had increased to age 81. Of course, this is good news for most people who can look forward to a long and healthy retirement, but for the companies responsible for paying their pensions it’s a massive financial burden.

Other factors which have contributed to a continual decline in DB schemes, include recent investment market crashes, low bond yields, increased regulation and accounting requirements, combined with the general rise in salaries during the boom years. At this stage, many companies have come to the obvious conclusion, that they cost too much, and those costs are loaded with uncertainty. According to the Pensions Authority the number of DB schemes in Ireland fell from 2,557 in 1991 to approx. 598 in 2018, with only 388 of them being active schemes. Today, many people are wondering whether their pension scheme will still be there when they retire. The level of protection in place for members of DB schemes is also relatively weak in Ireland compared to our closest neighbours.

What’s the alternative?

A great number of people with retained benefits in defined benefit pensions are reviewing the option to take a transfer value from their plan, to gain ownership of the capital value and manage their own retirement income. For some, this decision will be as a result of the uncertainty outlined above, moreover people are also focusing on the positives of moving to a defined contribution arrangement:

• Potential to pass on wealth to the next generation (DB pensions end with the current generation)
• Income flexibility
• Potentially a larger tax efficient lump sum payment

More employers are also “topping up” transfer values called enhanced transfers, to incentivise members to exit DB schemes and ultimately reduce the cost and risks of maintaining a DB scheme.

Areas that give people reservations, during these conversations are: “What if I live too long and my fund runs out”, “What if there is a market correction or recession”.

Areas to consider when assessing a DB transfer option: What factors need to be weighed up?

1. The Quality of the Promise

On first impressions, a Defined Benefit pension scheme is the best type of pension you can have – the “Rolls Royce” Pension. However, this depends on the scheme’s ability to fund its’ pension obligations for all members going forward. Benefits under Defined Benefit Schemes are not guaranteed. If a scheme’s assets are not sufficient to pay the benefits, and the employer is not in a position to meet the shortfall (and is NOT obliged to), the pension promised to you may have to be reduced. Consideration therefore needs to be given to the financial health of the Scheme and the future financial health of your former employer – in so far as this can be determined.

2. The Hurdle Rate

This is all about calculating the assumed level of investment growth required on the transfer value, to provide you with the same level of benefits that the Defined Benefit Scheme promised to pay.

3. Cashflow position

By retaining ownership of the pension capital value, you retain greater flexibility to structure future income streams, and aim to stay within the 20% income tax rate. In this context savings and/or the Tax Free Lump Sum can be used to complement income levels.

4. Legacy

With a Pension transfer the balance of your unused fund value will be retained by your family. Under a DB arrangement, depending on the scheme terms your spouse or children up to a certain age, may receive a % of your promised income, normally 50%. As you know there are no absolutes in life, with DB’s the phrase “A bird in the hand is worth two in the bush”. In my experience, this is the overriding reason why my DB clients retained ownership of their transfer value. The promise of €?? p.a. v’s the lump sum transfer now. Your current health status will play a key factor in your discussions. having ill health or reduced life expectancy makes the decision to take the transfer option more compelling for most.

5. The Lump Sum

An additional advantage in taking a transfer payment to a Defined Contribution arrangement relates to the options available at retirement. Defined Benefit Schemes only offer the option of an annual pension and/or a lump sum at retirement. Lump Sums are calculated by a formula relating to final salary and service, with a maximum lump sum payable of 1.5 times final salary. This Lump Sum is normally required to be commuted from your quoted annual pension, usually at a rate of 9:1, therefore reducing your annual pension and spouses’ pension.

All Defined Contribution arrangements (including Personal Retirement Bonds) now have access to an additional set of options. In addition to the option of an annual pension, Defined Contribution pensions can pay Lump Sums of 25% of the accumulated fund at retirement and invest the remainder in an Approved (Minimum) Retirement Fund (A(M)RF) post retirement. An A(M)RF is a personal asset.

6. Investment

The long-term expected return on equities and property is unknown but it is common to project on the basis of a 5% p.a. (the Society of Actuaries in Ireland) return before charges. We generally expect Alternative Assets to generate a return somewhere between cash/bonds and equities/property over the long-term.

As part of our overall risk assessment process we assess your capacity to take measured risk, your attitude to risk and through our Fact find and discussions, your overall asset profile i.e. (current savings & Investments – 25% Pension tax free)

If you take the transfer value, you will carry the investment risk. Our Investment strategy helps to avoid “sequence risk” (investment underperforms in the short term relative to expectations) , the 5-year income plan (held in the Cash Fund), provides a buffer to market volatility.

7. Health

We have seen an increase in requests for an additional Health Declaration form by the Trustees of DB schemes. This form is required to be completed by the pension holders GP to confirm members health status. The reason for this is that some DB Trustees are not willing to allow any member with ill health or impaired life expectancy to take their transfer value. The view of the Trustees is that permitting such transfers is not in the interest of the remaining members. It would be reasonable to suggest that the transfer option from DB schemes may not continue to be available for everyone in the future.

Offering your employees Death in Service, Income protection and Pensions benefits will help retain staff and enhance employee satisfaction.

One of the main challenges for businesses is to attract and retain good staff. Having a comprehensive employee benefit package, such as pension, death-in-service, and income protection benefits, can really put you ahead of the competition.

Proposition

At Murray & Spelman Financial Services we have the track record and experience to ensure the management of the Pension Scheme runs smoothly for your Business, the Management team and Employees.

We will arrange an initial comprehensive presentation followed by periodic presentations to scheme members to explain how their pension plan works, their investment options and the other employee benefits provided by your Business.

The key elements in the delivery of this service are proposed as follows:

Employee / Member engagement

We will design an engagement plan which will include the following advisory services:

• Employee Benefit Package – we will actively promote the Pension Scheme and associated benefits to all members of staff through group presentations, video calls and one to one meetings. We will help members to engage and understand their retirement planning process to enable them to better prepare for their retirement.
• Pension Funding Review– we can analyse members pension position, by looking at member target pension, contribution level and pension investment performance.
• Financial Wellbeing / Personal Financial Reviews – when requested by the members, we will advise on their day to day personal financial arrangements to ensure their goals will be achieved. This includes, pensions benefits accrued from previous employment, Life & Serious Illness cover, Mortgages and Savings/Investments.
• Joining the Pension Scheme – when new members are joining the pension scheme we will engage with and advise the member as to how the scheme works and the benefits.
• AVC Investment– we will advise and encourage Additional Voluntary Contributions (AVC’s), in addition to member pension scheme contributions. Illustrations on how AVC payments can enhance member retirement benefits will be explained.
• Leaving Service Options– when leaving service, we will advise on member leaving service options.
• Retirement Advice – when members have reached their retirement age, we will engage with them on the retirement options available to them, maximising their Tax-Free Lump Sum, advantages/disadvantages of Annuities v’s Retirement Funds. The purpose here is to cut through the jargon, to empower the member to choose the best option for them based on their circumstances.
• Risk Benefits – these benefits are generally undervalued and misunderstood by employees until they are needed (family benefits on death and disability).

It is important that we assist employee understanding of the pre and post retirement planning issues with pensions. It will contribute to the feeling of financial wellbeing.

New or Existing Schemes

Issues to consider when setting up or accessing existing schemes

• Vesting Rights
• Employment Categories
• Risk Benefits
• Trusteeship
• Pension Pricing
• Bundled 0r Unbundled
• Provider Assessment
• Emerging Legislative Obligations – IORP II, (Auto Enrolment)

Group Risk

Employers can provide Group Risk Benefits to their employees under three heading:

1. Group Life Insurance (Death-in-Service) ensures that an employee’s family or dependents will be financially provided for in the event of the employee’s death. Payment to the employee’s dependents can be made via Lump Sum, Spouse’s Pension or Children’s Pension.
2. Group Income Protection, (Permanent Health Insurance – PHI) protects your employees from loss of income due to long-term illness or injury. Income Protection is designed to provide an income for employees if they are unable to work for a prolonged period of time due to illness or injury. Payment begins once a predetermined period called the “deferred period” has passed since the onset of the condition leading to the claim.
3. Group Serious Illness Cover pays a lump sum to employees if they are diagnosed with one of a number of specified serious illnesses. A serious illness payment will be made only once. It provides a lump sum (and, sometimes, a dependent’s pension benefit) on the death of a member of a scheme.

Why would an employer set up Group Cover for their employees?

• As an employer you can write off the full cost of providing the benefits against corporation tax.
• Recruitment and Retention of employees
• It is an attractive benefit to offer current and future employees.
• The underwriting requirements for group life assurance are much less stringent than for individual life assurance cover.
• Some employees who may not qualify for individual cover, may qualify group cover
• As cover is organised on a group basis, costs are significantly lower than equivalent individual life assurance cover.
• Administration much more straightforward than purchasing equivalent life assurance cover policies for each individual employee.
• Employer contributions to a pension are treated as a business expense and are not subject to Employer PRSI
• Employer contributions do not count towards the individual’s Revenue limits

Auto-Enrolment

The Irish Government is planning to launch an auto-enrolment pension scheme from 2022. Automatic enrolment in Ireland is being mooted as a measure that, if introduced, could bridge the pension gap.

The State pension retirement age has been in the news a lot lately. Will the qualifying age be extended upwards or be reduced back down?

Pension Time Bomb
You may have heard the above term in the news. What does it mean and why should it concern you? It’s all down to Irelands demographics! For every, one person who retired in 2019 there were five workers – by 2050, for every one person retired there will be only two workers!

If introduced, automatic enrolment would oblige employers to introduce a workplace pension scheme and automatically enrol their employees into the scheme. Employers would then be obliged to contribute a percentage of an employee’s salary to help fund their retirement.

The Government is also supporting this idea to bridge the pension gap. This gap exists and will certainly continue to grow because the State pension will not be sustainable in the future due to increasing life expectancy and an ageing population.