Big pension decisions loom for newly retired

With over 7000 civil and public servants opting to take up the latest enhanced early retirement offer from the government, a great many of them will be wondering what their options are regarding the ‘extras’ associated with their impending retirement, specifically, what to do with their tax free lump sum payments and their AVC accounts –Additional Voluntary Contributions that they may have been contributing to make up for lost service years.

With over 7000 civil and public servants opting to take up the latest enhanced early retirement offer from the government, a great many of them will be wondering what their options are regarding the ‘extras’ associated with their impending retirement, specifically, what to do with their tax free lump sum payments and their AVC accounts –Additional Voluntary Contributions that they may have been contributing to make up for lost service years.

Money Express with Jill Kerby in association with Aviva

They should certainly expect offers of advice from their banks (which will see a large amount of money suddenly appear in their accounts) or any financial advisors or brokers that they may have dealt with in the past. No matter how much your pension fund or lump sum is worth, or whether you are a public sector retiree, working for a private employer or for yourself, it is essential that you fully understand what options are available to your regarding your tax free lump sum; your AVC, if you have one, what can and cannot be done with the bulk of the pension (if you have a private sector defined contribution pension, the kind that is based on the savings and investment performance.)

For the civil and public servants leaving their jobs at the end of February, they will know by now the size of their enhanced retirement income, the size of their lump sum and how much they will get tax-free.

However, they should be careful about only getting advice on what to then do with the tax-free lump sum or the proceeds of their AVC (if it is not already part of their final pension calculation), from the mainly commission-paid brokers who often have the contract (sometimes exclusively) to sell general and life assurance products to public servants via their departments or unions.

The lump sum available is often a sizeable amount of money (upwards of €100k plus for higher earners). Any public or civil service worker who is getting one should carefully research for themselves what savings and investment choices there are and/or seek the advice of experienced authorised advisors, preferably fee based ones.

Private sector workers who are members of similar defined benefit, final salary schemes to those in the public sector can also get a tax-free lump sum, a retirement income based on their final salary and years of service, and they may also have an AVC. They too have some important decisions to make.

Retiring private sector workers who have DC or defined contribution pensions, the value of which is solely based on contributions into it and fund growth, are also entitled to a tax-free lump sum; they may also have an AVC. But, along with PRSA holders (available to the self-employed and workers who are not members of occupational schemes) they have more options than defined benefit pension members on how the balance of their fund is used to produce a retirement income.

First, their company can provide or purchase an annuity pension for life for them, based on the value of their fund or they can do this themselves. Or they can take the cash in their fund (less their tax free portion) but they pay their highest rate of income tax on this sum. Depending on whether they meet various terms and conditions, they can transfer their fund value, less their tax-free lump sum, to an Approved Retirement Fund or an Approved Minimum Retirement Fund that can be left to continue to grow in value. This is an option people who have other resources, or have another income will take, until they are ready to fully retire.

Again subject to conditions– and the AMRF is much more restrictive – this pension fund option allows the holder to determine for themselves how much income or capital they draw down to suit their ongoing circumstances. (How ARFs work and the kinds of ARF that are available to pensioners is a story we’ll return to soon.)ARFs are popular to those who qualify for them because pension annuities, based on bond prices, have been such poor value: a €150,000 pension fund might buy a 65 year old an annual income for life of just c€6,700 that is guaranteed for five years and provides a two-thirds pension for a spouse. Thank goodness so many retirees qualify for the state pension of nearly €12,000.

But to return to that hopefully, pleasant, dilemma the public service 7000, and anyone else retiring this month are facing – what to do with the lump sum, most advisors recommend that you first consider paying off your debts, especially credit card and other higher cost variable rate debt, followed by personal loans and, for peace of mind, mortgage debt. It should be a taken that personal udgets and spending habits will be revised to take into account that you are now living on a fixed income but with fewer job-related expenses.

With the balance of your pension fund cash, you can now look for the most suitable and safest returns from savings accounts and/or investment options. They need to suit your goals for your money as well as your risk profile and take into account the overall value of your assets and wealth, such as property, cash, stocks and shares, art/jewellery. A good advisor will also remind you to take into account issues outside your control, like future tax and austerity measures, price inflation and currency devaluation risk (as in, whether the euro will survive).

Retiring with confidence isn’t easy. It requires some effort on your part, a clear head to understand the complexities involved and good advice. Most of all, don’t rush your final decisions. You have the rest of your life to enjoy, or regret them.

jill@jillkerby.ie