Retiring from a Company Pension Scheme
Part 1 – Determining your Income Requirement
If you are in a company pension scheme and are approaching retirement you will soon have some big decisions to make. Between you and your employer you have made a large financial commitment to the scheme over your working life. With a 20 year plus time horizon for most in retirement, how can you make the most of these savings to ensure that you can secure your income and live the lifestyle you want in retirement?
The first step is to understand what type of pension you have. It may be a Defined Benefit pension, where you will receive a percentage of your salary for the rest of your life from the date of retirement; or a Defined Contribution pension where you will have a capital sum at the date of retirement to provide your own income.
The next step is to determine your income requirement in retirement. Having a realistic estimate of what your expenses will be in retirement is important because it will affect how much you need to withdraw each year and how you invest your fund.
It’s not unusual that people will understate their expenses and overestimate the income they expect from the pension.
The danger of this is that if you understate your expenses, you easily outlive your fund, but equally if you’re over cautious on expenses, you can risk not living the lifestyle you want in retirement.
Next we need to look at where the retirement income will come from. We need to distinguish between the different sources of income as there will be different advice requirements, particularly for private pensions; and different tax treatments where personal assets are being used to fund the retirement and the State Pension entitlement.
- State Contributory Pension – the full pension entitlement is almost €13,000 per annum and forms the bedrock for most retirement income projections.
- Income from personal assets – this may be income produced by the asset, e,g, rental income, or a draw down of the capital. The tax treatment needs to be determined to quantify the net income that will be received – it may be taxed as income tax (up to 52%), exit tax on funds (41%) or Capital Gains Tax (33%).
- The third source of income may be from private pensions. There will be very different advice requirements if you are retiring from a
- Defined Benefit Scheme or a
- Defined Contribution Scheme.
For Defined Benefit pension schemes advice may be required on the lump sum decision – whether to commute the pension or take it from AVCs?
Where to invest those AVCs, for example if there are no pension increases in retirement how can they be invested to best protect the income against inflation?
Or there may be a transfer value offer from the Defined Benefit Pension that you want to consider and this decision will be very personal to each individual.
Defined Benefit Transfer considerations might include:
The hurdle rate – what investment return is needed to replace the income foregone?
Your health. If life expectancy is reduced do you want to preserve the capital?
Spouse’s pension. Whether or not one is payable and if it would be sufficient?
For Defined Contribution schemes the decision on taking an Approved Retirement Fund (ARF) versus an annuity is always a consideration, particularly for the purpose of comparing the lump sum entitlements with each option. While the ARF option will offer greater flexibility of income drawdown and capital preservation, and as markets fall, income may fall and you need to be aware of the risks.
When we have established your sources of income, gone through the lump sum options and the taxation treatments we can now paint a picture for you of how your income will be paid in retirement. We then need to look at how investment returns will affect your income during your retirement. This will be covered in our next blog Retiring from a Group Company Pension Scheme: Part 2 – Investment Risks and Income.
Should you require financial advice on a Defined Benefit Pension or Defined Contribution Pension, please contact Harvest Financial Services on 01 2375500 or email email@example.com to speak to one of our professional advisors.
This material is not intended to provide advice and is provided for general information purposes only.
The legislative information contained herein is based on Harvest Financial Services Limited’s understanding of current practice as at July 2020 and may be subject to change in the future.