have an old defined benefit (DB) pension scheme from a previous job – and a defined contribution (DC) pension scheme with my existing employer. I have about five years to go until I retire. Is it true that I have better options at retirement with my DC scheme than my DB scheme? I have heard that I am restricted with what I can do with my DB pension when I come to retire. Imelda, Dun Laoghaire, Co Dublin DEFINED benefit (DB) 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 one-and-a-half times final salary.
All defined contribution (DC) pension arrangements (including Personal Retirement Bonds) now have access to an additional set of options. In addition to the option of an annual pension, DC pensions can pay lump sums of 25pc 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 which provides greater flexibility in terms of how income is accessed post retirement, when compared to the traditional DB annual pension. However, there is a risk that you could outlive your A(M)RF if you draw funds out too quickly. This is not a risk you need to worry about if getting an annual pension from your DB scheme.
If you die before your A(M)RF is spent though, it can be passed on as part of your will. DB pensions usually have spouses or dependants pensions included. This means that in the event of your death while in receipt of a DB pension, if you had a spouse or a dependant still alive, some of your pension would continue in payment to them after your death. If your spouse pre-deceases you or you no longer have dependants, then the DB pension effectively dies with you.
So in short, the advantages which a DC scheme might have over a DB scheme include the potential for greater lump sums, flexibility in terms of access to income, and flexibility for succession planning.