Is this a bad time to opt out of defined benefit pension?
Charlie Weston Your Questions
QI have a defined benefit (DB) pension entitlement from a previous employer. I now have the option of transferring it out to a new individual pension arrangement. What investment return or risk would be needed on the transfer value offered to at least match my DB scheme pension entitlement guarantee? And is now a bad time to do this because of Covid-19?
AFirstly, both options you have presented will be affected by the impact Covid-19 has had across most investment markets, according to Glenn Gaughran, head of business development at Independent Trustee Company. This means you should tread carefully in terms of decisions and timing.
A defined benefit pension is a promise of an agreed amount of pension on retirement. It is not a guarantee, he said. This promise is only as good as the financial stability of the scheme and the employer. Lots of employers have, in recent years, reviewed their commitments to DB pension schemes because of the high cost of funding them, Mr Gaughran added.
There are many variables to consider: your current and potential future financial position; the health of you and your spouse; how important is control and flexibility to you, against greater security and certainty.
There are risks with both options. By transferring out you assume the investment risk whereas you must consider the continued solvency of the DB scheme. There is no legal requirement on employers to continue to fund any deficits, Mr Gaughran said.
Taking a transfer value may give you more control. If you do this, what you receive in retirement will depend on the investment performance of the fund. For example, you might invest in property and the rental income could act as your pension in retirement.
You could also invest in shares, equities, funds, bank deposits. You then decide when you want to draw down the benefits, some time after the age of 50. The first €200,000 is tax free, and the balance is taxed at 20pc, up to €500,000. It’s important that you take independent financial advice, Mr Gaughran said.
QDue to a significant reduction in our income, we have no option but to reduce our health insurance cover. Can you recommend the best entry-level plan for now.
AWe asked Dermot Goode of TotalHealthCover.ie. In terms of entry-level cover, he recommends you should consider any of the following: Select Starter from Irish Life Health at €506 per adult; Assure Protect from Laya at €495; or the PublicPlus Care scheme from VHI at €489. When engaging with your insurer, explain your circumstances to see if they will allow you to upgrade your cover again within three or six months without any “upgrade rule” restrictions, he added.
QI am turning 65 in August of next year and my employer expects me to retire at that point. I have a personal pension, but it’s not much. My husband is also 65 and retiring this year. Someone told me in January I would have to wait two years, until I’m 67, before I could get the State pension but I thought I saw something in the paper that this has now been changed and I will be able to get it at 66. Could you clarify it for me?
AIt is easy to see why you are so confused, because although there have been reports to that effect, other media reports suggest there has not yet been a definitive decision made. Currently, State pension age is 66, but that is due to change to 67 on January 1 next year, according to the chief executive of the Irish Association of Pension Funds, Jerry Moriarty.
In late April, Fianna Fáil indicated the new government would row back on plans to increase the State pension age to 67. The party stated that once you turn 66 you will be eligible to receive a State pension payment. And while it was originally envisaged that retirees would have to claim Jobseekers Benefit for the interim period, between 65 and when they are eligible for the State pension, Fine Gael said during the election that the new government will be looking at introducing a transitionary State pension payment, Mr Moriarty said. It has yet to be revealed how this would work, or how much it will be worth, but we are hoping for some clarity over the coming months. He suggests you check again in a couple of months when the new programme for government has been agreed.