Last Wednesday was a day full of excitement. Ireland beat Italy in the Euros to get out of our group and through to the round of 16. Earlier, an announcement was made by the Minister for Finance that got all of us who work in personal finance all excited. The ARF option is being made available to those who take a transfer value from defined benefit pension schemes.
If you transfer the value of the pension benefits from an old employer into a Buy Out Bond, you are still subject to the rules of the old pension scheme. The ARF option is not available under the defined benefit scheme as that would mean the trustees having to pay out a lump sum to put into your ARF. Most defined benefit schemes cannot meet all of their liabilities (even if they meet the very low minimum funding threshold), so paying out large lump sums would have resulted in schemes becoming insolvent.
The argument that has been made for the last 5 years is that if someone transfers the value of their defined benefit scheme to a buy out bond before retirement, they are no longer in a defined benefit scheme, their benefits are now in a defined contribution environment (you take the investment risk) and the employer’s financial obligation is now finished.
There are two big changes resulting from Wednesday’s announcement :
Under the old rules, the tax free lump sum was based on your final salary and years service. The higher the salary and more years service, the bigger the lump sum payable.
If you choose the ARF option, you get 25% of the fund value of the buy out bond paid to you tax-free.
You can still avail of the old calculation method if it is more beneficial to you. You have to purchase an annuity with the remainder.
Previously, if you transferred the value of your defined benefit scheme , you had to purchase an annuity. With annuity rates so low, you were stuck with getting a relatively low payment and once the annuity was in place, you couldn’t change it.
Most people prefer to have control of their pension fund in retirement. Even though there are no guarantees, they can withdraw money as they wish and they know if there is still money there when they die, it goes to their family. The ARF option is now available to all defined contribution plans.
In the complicated world of pensions, this certainly makes things a lot better. Now, they need to get rid of the AMRF!
If you have any questions, send me an email to steven@bluewaterfp.ie