The method of valuing defined benefit pensions changed with effect from 1 January 2014. Previously, a capitalisation factor of 20 was used to value defined benefit pensions e.g. a pension of €50,000 was valued at €1m. It didn’t matter whether you retired at 60 or 70, the value of the pension fund was the same as far as the Revenue was concerned.
From 1 January 2014, the capitalisation factor has been altered depending on your age. For example, a pension paid at age 60 is valued at 30 times the benefit paid while a pension paid at age 65 is valued at 26 times the benefit paid. This new method of valuation applies to pension benefits accrued from 1 January 2014. The old system still applies to benefits accrued before then. Unless…
…The old valuation system for pre 2014 benefits only applies where ‘the scheme administrator is satisfied, based on information and records available to the administrator, that there is an accrued pension amount in respect of that event’. In other words, you need to be sure that your scheme administrator has a record of your benefits as at 1 January 2014 or has a system that can roll it back to that date. If they don’t, the new rate applies to the entire pension. For some, this may result in going over the €2m maximum fund threshold and a large tax bill.
For those not retiring soon, this will mean relying on accurate records being kept for decades. Who knows who will be looking after your pension benefits when you come to retire? Do you want to rely on someone else keeping the correct records for that long? Both current and deferred members of defined benefit pension schemes should request a statement of benefits as at 1 January 2014 or as near to that date as possible. This is especially important to deferred members who don’t get sent benefit statements.