Q My current employer is winding up its defined benefit (DB) scheme as my boss is being bought by another company which has decided not to continue the scheme. I’ve been a member of the scheme for 25 years and have ten years to go before I retire. It’s unclear if my new employer will offer any kind of company pension and so, it appears to be a choice between transferring the DB benefit that has built up to a PRSA or a Buy-Out-Bond. Which is the better option and do you have any advice around how I can ensure the transfer goes smoothly? Pat, Co Galway
HAS One of the main differences between a PRSA and Buy Out Bond (BOB) is around the ability to contribute additional funds into the schemes.
A PRSA can receive new contributions to top up your current pension pot, but a BOB can’t take in new contributions. It could be sensible to transfer to a PRSA if there is a possibility that you may wish to lodge further funds to your pension.
As you mentioned you have another ten years before retirement, I will assume you will be retiring at 60. Under Revenue rules you’d be able to contribute 30pc of your salary and claim pension tax relief (subject to a maximum salary of €115,000) when aged between 50 and 54, and 35pc when aged between 55 and 59.
Another factor to consider is the difference in costs between a PRSA and BOB. A PRSA is generally more expensive than a BOB due to the additional regulatory and reporting requirements. For smaller PRSAs, the charges can be higher – but it is possible to find more favorable charges for larger scheme sizes.
Other areas that I get asked regularly about are investment options and death benefits. The range of investment options under a PRSA and BOB are similar and generally both allow the same range of investments into the likes of funds, equities, and property. With regard to death benefits, both a PRSA and BOB will pay out the full value of your scheme on death to your estate, provided there is no other occupational scheme linked to your employment upon death.
It is important to seek financial advice to fully assess which transfer option would best suit you and your needs.
A financial advisor will also be able to assist you in establishing a new pension scheme and will work with the new provider to ensure the assets are transferred across efficiently.
Moving UK pension back home
Q I’m Irish – but I left Ireland about 15 years ago to live and work in the UK. I will be moving back to Ireland for good shortly as I have accepted a job in Ireland. I have a private defined contribution (DC) pension through my current UK employer. I’ll be able to join a DC pension scheme with my new Irish employer – once I have worked there for at least six months. I’m considering transferring the benefit that has built up in my UK pension into the pension scheme that I am due to join when I move back. Is this a good idea? Sean, London
HAS As a first step, check with the trustees of the UK employer scheme that they are willing – and able – to transfer the benefit to an overseas pension scheme. Given the scheme is a private DC pension, it should be possible for the pension to be transferred to Ireland. Secondly, to facilitate the smooth transfer of the pension benefits, the assets should be liquid – as in our experience, illiquid assets can be very difficult to transfer.
Should you be transferring your UK pension into Ireland, the receiving pension scheme needs to be a Qualifying Recognized Overseas Pension Scheme (QROPS). In simple terms, a QROPS is a pension that can receive a transfer of a UK pension tax-free. A QROPS here offers flexibility, taxation and investment advantages for UK pension holders like yourself who are looking to move home. There are however certain investment restrictions that follow the UK benefit, such as not being able to invest in residential property.
You will need to ask your new employer if the DC pension scheme in Ireland is registered as a QROPS. If it is, you should be able to request the UK trustees to transfer the pension benefit to it. However, if it isn’t, there are a number of pension providers that offer QROPS that could accept such a transfer. If you are considering contributing from your new employment into the company pension scheme, but it can’t accept your UK pension, there is no issue opening a second separate approved QROPS that can accept and allow you to invest your UK scheme.
It is important to talk to a financial advisor who can review your circumstances and assess the benefits and most suitable QROPS.
Pension treatment after death
Q I’m in my early Fifties. I’m in good health but my father died around my age so I’m worried that the same may happen to me. I have a small self-administered pension scheme (SSAS) through work. In the unfortunate event that I die before retirement, what happens to my pension scheme? Enda, Dublin
HAS Should you die before retirement, the distribution of funds from a SSAS will depend on whether the benefits are deemed to be active or preserved.
In the case of active benefits (that is, where the member was actively contributing to the SSAS prior to their death), upon the death of the member, the fund is liquidated.
A lump sum of four times the member’s final salary – plus the value of any personal contributions made by the member to the SSAS – is paid in accordance with the rules of the scheme to the estate.
Any surplus remaining is used to buy annuities for the member’s dependent or dependents. Any balance of the fund thereafter is returned to the employer as a refund of contributions.
The recently introduced Finance Act 2021 allows the member’s dependents to purchase an Approved Retirement Fund (ARF) rather than an annuity in these circumstances – which is a welcome development.
However, with preserved benefits (where the member has left employment or is no longer actively contributing to the scheme and has yet to draw a pension benefit), in the event of death before retirement, the full value of the fund is liquidated and paid out to the estate.
If the fund is no longer active (that is, no longer being actively contributed to by you), you together with your financial advisor, should consider making it preserved or ‘paid up’ to protect against the risk of being limited to a lump sum of four times final salary on death.
For example, if not paid up, with a fund value of €1.5m and a final salary at €50,000, then the lump sum will be just €200,000 – with the balance used to purchase annuities/ARFs and/or to be refunded to the company.
Alternatively, depending on your circumstances, it may be appropriate to transfer the benefits to a PRSA or a Buy Out Bond.
Now is the time to talk to both your financial and legal advisors about how your pension benefits will be treated on your death and any measures that should be taken so as to ensure that your intentions are complied with.