For Baby Boomers getting their first job in the 60s or 70s, the key piece of financial advice was “Get a job with a defined benefit pension and stick to it like chewing gum to a shoe” (substitute your own metaphor here). That was excellent advice, and for those that followed it (and who’s pension scheme survived) the rewards are now there to be enjoyed. But should you be happily banking a monthly pension payout, or should you be thinking of cashing it in and taking a lump sum?
Cashing it in was previously unthinkable, before quantitative easing had started to erode interest rates. However, with bond yields now at a historic low, the lump sum equivalent is at an all time high.
Imagine you are about to step off the career ladder and start to draw your defined benefit pension of, say, €25k. With a multiple of around 40x at the last time of asking, that is equivalent to a transfer value of €1 million. A number large enough to make you stop and think.
Now its not all cash you can put straight in your piggy bank (although you are eligible for a retirement lump sum when you retire from the fund), but it can go into your own self administered fund, where it can be invested in a variety of things to pay you an annual income. With an interest rate of around zero, investment isn’t as easy as it was, but with professional help a yield of 2.5% (the equivalent of the €25k pension) doesn’t sound overly ambitious.
This way, the responsibility lies with you for investing sensibly. Leave things as they are and your annual €25k, plus inflation, is guaranteed with no risk to you.
However, when you pop your clogs and leave a surviving spouse, they typically get half of what you get. If you die after your spouse the €25k dries up and the money behind it is gone. Put it in your own plan and the €1m is still there, or what’s left of it after your round the world cruises, for passing on to the next generation. But that’s another story.
Don’t take our word for it – we are not professional financial advisers – but if the numbers above arouse your interest, maybe its worth talking to one?
Is 40x a realistic basis in the Irish market? I believe UK transfer values are much more generous than Irish ones. The DB pension may be indexing too which is a factor to consider. Also if you had a €100m ARF (lucky you!), you couldn’t just take 25k a year and let the rest grow, you have to take a minimum income of 4% – 6% a year depending on your age and you’re taxed on that as income. One should emphasise this decision is not reversible and people should talk to a professional before making it!