We have recently had a number of queries from individuals who have been offered a transfer value from their Defined Benefit Scheme. In many of these cases they have been offered an enhanced transfer value (ETV). This means the scheme is actually willing to give them a higher transfer value now in order to get them off the schemes books.
In many cases these ETVs are only on offer for a short period of time so it is extremely important that you seek indepedanant financial advice so you are fully aware of all of your options.
Basically your decision needs to come down one of two key factors:
- If I stay, what is the likelkyhood I will that I will get the benefit I have been promised by the employer when I retire?
- If I go, what level of risk would I need to take in order to get a fund that would offer me the same level of income as my DB scheme when I retire?
Below I have laid out some of the considerations that should be taken when coming to a decision. It is really important to point out that whatever decision you do make there is risk involved and it is only in very rare occaisons that there is an obvious answer on whether to stay or transfer out. Therefore, we would urge caution if you receive any advice that is “100%” certain that you should take the transfer value.
Stay in your DB Scheme – Issues to Consider
The main risk associated with staying in your DB scheme is that you might not get the income that you have been promised at retirment. This may happen for a number of reasosns:
- The value of your benefits could be reduced by the trustees through a section 50 reduction order before you reach retirement age
- The scheme could be wound up with a deficit before you retire. Current legislation gives priority to pensions already in payment over current or deferred members
- The scheme could be wound up with a deficit after you retire and your would receive a transfer value lower than the actual value of the benefits you had been promised
Take your Transfer Value – Issues to Consider
There are of course a number of risks associated with taking a transfer value from a DB scheme:
- Your fund may not grow enough to give you the same level of income as if you stayed
- You are now subject to investment risk, it is important to know the value of your funds may also go down as well as up
- You may be subject to Longevity risk i.e. you may outlive your income stream from the transfer value
- You may be offered a higher transfer value in the future, if the scheme funding levels improve over time.
We highly recommend that anyone who has been offered the option to transfer out of a DB scheme consult an independent financial adviser. An independent adviser should look at your overall financial situation before offering advice. A good adviser should be asking questions in relation to your:
- Attitude and capacity for risk
- Other income sources
- Other savings and investments
- Average monthly expenses
- Most importantly what are your financial goals
We ask these questions at Metis. We help you make the right financial decisions. Call us for a private consultation.
Financial Planner Metis Ireland
Metis Ireland Ltd t/a Metis Ireland is regulated by the Central Bank of Ireland. All content provided in these blog posts is intended for information purposes only and should not be interpreted as financial advice. You should always engage the services of a fully qualified independent financial adviser before entering any financial contract. Metis Ireland Ltd t/a Metis Ireland will not be held responsible for any actions taken as a result of reading these blog posts.