Should you take the transfer value?
When a defined benefit pension scheme offers you an enhanced transfer value, it can seem very appealing. You are asked to swap a guaranteed income in retirement for a lump sum you manage yourself. However, is this the best course of action for you in terms of value transfer? In this guide we explain how defined benefit schemes work and what an Enhanced Transfer Value (ETV) involves. We set out the advantages and the risks of taking a transfer value. We also explain why it is vital to get independent financial advice before you decide.
What is a defined benefit pension scheme?
Depending on your salary and years of service, a defined benefit pension plan guarantees that you will receive a fixed income in retirement. Your employer and the scheme trustees take responsibility for investing the contributions and meeting the cost of your pension when you retire. Typical features include
- A guaranteed pension each year for life
- The option for annual increases to your pension in line with inflation
- A spouse’s pension payable after your death
That certainty of income and the promise of a spouse’s benefit make defined benefit pensions very attractive. You know exactly what you will receive and your employer carries both investment risk and longevity risk.
What is a transfer value and an enhanced transfer value
Your future pension rights can be converted into a lump payment that you can transfer into another pension vehicle by using a transfer value. A standard transfer value is calculated by the scheme trustees using actuarial assumptions about interest rates and life expectancy. An enhanced transfer value comes with an extra incentive, often 10 – 30 percent more than the standard value. This enhancement typically applies for a limited period and is designed to encourage you to leave the scheme.
For example if your standard transfer value is €350 000 and the scheme offers a 20 percent enhancement your total lump sum rises to €420 000. Before you can accept an Enhanced Transfer Value most schemes will require you to get independent financial advice.
Key benefits of taking an enhanced transfer value
Greater flexibility over your retirement funds
With a transfer value you move to a defined contribution arrangement such as a Personal Retirement Bond or Approved Retirement Fund. You control how the money is invested and you can change your investment strategy at any time. You also decide how and when you draw your pension. If you prefer a drawdown approach or a different mix of annuity and drawdown you have that choice.
Potential for higher investment returns
If your chosen funds perform well your pension pot could grow faster than the cost of buying a lifetime annuity. That extra growth could mean more income in retirement. However higher returns never materialise without investment risk and past performance does not guarantee future returns.
Early access to funds
Deferring into a Personal Retirement Bond allows you to draw funds from age 50 once you have left employment. A defined benefit scheme often restricts access to age 60 or the scheme specific retirement age. Early access can help if you plan to retire before state pension age or if you have health issues.
Spouse and estate planning advantages
When you hold your pension in an Approved Retirement Fund any remaining fund passes to your spouse tax free under current inheritance rules. Defined benefit schemes offer a spouse’s pension but this is often a percentage of your original benefit. If you die after transferring out the full fund can be inherited by your dependants subject to inheritance tax thresholds.
Main risks of taking a transfer value
Loss of guaranteed income
The most significant drawback is giving up a guaranteed pension for life. If you opt for a transfer value you lose the promise of a fixed income and any annual cost of living increases. That certainty is replaced by market dependent returns.
Investment and longevity risk
You must manage your investments in retirement. Poor investment performance or outliving your fund are real concerns. Investment charges reduce the value of your pension pot. With a defined benefit scheme none of those risks fall on you.
Complexity and tax considerations
A transfer value moves your pension into a drawdown product subject to income tax universal social charge and PRSI up to state pension age. You must understand how tax will apply to your withdrawals. Defined benefit schemes deduct tax only when your pension pays out.
Key considerations before you transfer
Health and life expectancy
If you have serious health issues you may prefer a transfer value so your fund can benefit your estate on death. Under an ARF the full fund passes to your dependants and may avoid inheritance tax between spouses.
Employer covenant strength
Your defined benefit pension relies on your employer’s covenant to pay the promised benefits. If you work for a financially strong organisation you may feel more comfortable keeping your defined benefit pension intact.
Retirement age and flexibility
If you plan to retire early a transfer value offers more personal control. A Personal Retirement Bond can allow drawdown from age 50.Later in life, you may also decide to combine an annuity and a drawdown.
Advice and regulation
Accepting a transfer value requires regulated advice. A Financial Advisor will help you understand both the standard and enhanced transfer offers. They use modelling tools to compare remaining in the scheme versus transferring out. This analysis is essential for you to make an informed decision.
Comparing standard and enhanced transfer values
|
Element |
Standard transfer value |
Enhanced transfer value |
|
Base calculation |
Based on actuarial factors and scheme rules |
Base value plus incentive percentage |
|
Lump sum example |
€350 000 |
€420 000 (20 percent uplift) |
|
Advice requirement |
May not be required |
Regulated advice required |
|
Decision period |
Ongoing |
Limited time window |
|
Incentive |
None |
10–30 percent extra |
How Advice First Financial can support you
You can schedule a face to face appointment with our team in Buncrana or Letterkenny if you are in Donegal. We will
- Review your scheme rules and transfer offers
- Model the long term outcomes of staying versus transferring
- Clarify tax implications for Approved Retirement Funds and annuities
- Help you weigh up the trade off between certainty and flexibility
Our goal is to guide you through the pros and cons so you can decide with confidence.
Frequently asked questions about Auto enrolment, PRSA or DC pension in Ireland
What happens if I do not take the transfer value?
You will remain in the defined benefit scheme and receive the guaranteed pension at retirement. Any spouse’s pension or annual increases set out in the scheme rules will apply.
Can I switch back after transferring out?
No. You are unable to go back to the defined benefit plan after accepting a transfer value.That decision is permanent.
How do I know which transfer value is right ?
A Financial Advisor will compare both your standard and enhanced transfer values alongside your personal circumstances. This comparison highlights potential risks and benefits to help you choose.
What if my employer is in financial difficulty ?
Future payments may be uncertain if your employer has a weak covenant.Transferring out can move your pension into a regulated product that is protected under the Financial Services Compensation Scheme subject to limits.
Where can I get advice in Donegal?
To discuss your transfer value and pension options book an appointment with our Buncrana financial advisers . If Letterkenny is more convenient you can arrange a meeting with our Letterkenny office today.
Deciding whether to accept a transfer value from your defined benefit scheme is one of the most important financial choices you will make. By comparing guaranteed income versus investment flexibility and seeking expert advice you can choose the path that best suits your retirement goals.
