Equality at last for Defined Benefit Retirement Bond Holders following changes to Revenue practice
Retirement options on the treatment of Personal Retirement Bonds (PRB’s) for former members of Defined Benefit schemes has changed, to the delight and benefit of thousands of pension plan holders.
Up to now policyholders with a Personal Retirement Bond from a Defined Benefit Pension Scheme were forced to take benefits under the ‘traditional’ revenue formula of:
- A “Tax-Free” lump sum based on salary and service from the previous employer, and
- Purchase an income for life (Annuity) with the balance of the fund.
This may have been an attractive option when Annuity rates (the % rate used to calculate the amount of annual pension) were in double digit figures producing very attractive pension amounts. However, in recent years, annuity rates have reduced considerably to low single digit figures, making the pension far less attractive. Unfortunately, due to revenue rules the policy holder had no other route open to them, whilst their counterparts in a defined Contribution pension scheme had far more flexible options.
Thankfully, following many years of lobbying by the pensions industry, Defined Benefit Retirement Bond policy holders now have access to the same ‘alternative’ retirement options as their DC counterparts. The recent change in revenue practice allows the policyholder the option to choose, the traditional route above or take:
- a lump sum of up to 25% of the fund, and
- Invest the balance in an Approved Retirement Fund (ARF) or an Approved Minimum Retirement Fund (AMRF).
This finally allows former DB members the same retirement flexibility that other pension policyholders have had for some years now. This change may be extremely beneficial to anyone who is a “Deferred” member of a Defined Benefit pension scheme. Be that due to leaving the employment, being made redundant or indeed, following the enforced wind-up of a DB scheme.
There are pro’s and con’s for both options and these need to be discussed and considered very carefully. One of the main pro’s for a DB pension was the promise of a “guaranteed” income for life. Ironically, in some very high profile cases over the years, policyholders were left high and dry with little or no pension from the scheme, which made it one of the major con’s of this option. While this is not an issue for the Retirement Bond holder (as they are now outside the scheme), it is a concern however, for many “Deferred” members who’s future pensions are still under the control of the DB scheme. The main concerns of the Retirement Bond holder, are the extremely low annuity rates on offer currently and, are there other options open to them? Now there are.
Policyholders are strongly advised to seek independent financial advice before making a decision either way as, depending on the option chosen, the decision may not be “undone” at a later date. At the very least, get to know what these changes could mean to you and your family “Before” making any decision.
Might you or someone close to you be affected by these recent changes in practice? If so please feel free to contact us at any time for independent advice.
Pierce Grace QFA
Tax & Financial Adviser
087 239 6762
pierce@kcfb.ie
