Lump sum portion on retirement - What If?

hamster

Let's see what Board members think of this.

I have a Company Pension. I'm on 38K and contribution currently my maximum 15% allotment for my age while the company contributes 5% putting in a total of 633 euro per month. I will turn 30 this summer and plan to increase the contribution to 20% to take advantage of the relief. The reason for max input now:

i) Since time means a lot in the investment formula I figure that this stand to me in 20-25 years time.
ii) The Industry I am in is not kind to long termism. I may not always get 42% relief on contributions and be in a position to put this kind of money in.

I have a question on this. When I retire I will be able to take a lump sum of 1.5 times final salary. Ok, fair enough. That's fine if I work up until I'm 65 say and retire and get 1.5 times final salary on the day I retire. Great. Now.... what if...

i) I was let go next year and never worked again. What would be 1.5x "final salary" lump sum I would get? Assume the fund contributions meet the minimum requirements for a lump tax free sum.

ii) What if I got another job and "paid up" the current pension.. ie let it grow while contribute to another. Would I get 1.5 "final salary" from one fund and the same from another one (ie if I started another company pension). Would the new salary affect the final salary of the last job?

iii) What I stopped working at 35/40? Would not my "final salary" tax free lump be very small When I "retired" at 60/65? ie, you must work until the last moment to get a decent lump part.

iv) What if you got a low-paying job in the last 5 years (just what if) of your working life span and it happened to be 50% less than before, would that mean your 1.5 final salary lump in any or all the funds be affected by what you finished on?

A lot of questions I know! I guess I just would see what anyone of you think what the situation is on this at the moment. Pensions seem very inflexible and assume you got a steady state job for 30 years!

Victor

Originally posted by hamster
ii) What if I got another job and "paid up" the current pension.. ie let it grow while contribute to another. Would I get 1.5 "final salary" from one fund and the same from another one (ie if I started another company pension). Would the new salary affect the final salary of the last job?

As best I know you can only have one company pension, although you can have company pension + one of the new supplementary schemes.

hamster

I assumed you can have more than one - once you only actively contribute to one company pension... and make the old company pension "paid up". If I had to move funds from one pension to another throughout my life I would lose a fortune since each move would potential cost me due to commissions, entry spreads, set up charges blah blah! All "paid up" are like this pension.

For example, my current situation is that I have a "paid up" personal pension which will be accessible when I hit 60-65. Of course, being such a "Flexible" pension, it is locked in an agressive investment posture at the moment. That is, it is 90-100% invested in equity which can't be altered. ie, It will be high risk right up til retirement. A proper flexible "paid up" pension would surely allow you to move it gradually to less riskier profiles as retirement age approaches. I agree that if it isn't made "paid up" then I would have to transfer it to the current company pension that I have. So my current Company pension is the active one which I can of course be "flexible" with until that too may become less "flexible".

But my main query is really what happens to the 1.5 times salary tax free payout on retirement? What "final salary" is take? An average? The last time you worked? Even if you were at the bottom of the scale 10 years before retirement? Vague vague vague....


* I'm talking about Company not Personal pensions which allow you to take a 25% lump sum tax free assuming you meet the minimum ARF requirements.

Earthhorse

Okay, it sounds like you may be getting confused about the Revenue Maximum Cash Sum you can take on retirement and what your Company Pension Scheme is providing for you.

1.5 times Schedule E earnings is the maximum amount you can take on retirement provided you have twenty years service. Most Group Pension Schemes do not fund for this level of benefit. Perhaps yours does – if so consider yourself very lucky.

To be honest all the questions you have asked need to be answered by the administrator of your Company’s Pension Scheme. Ask HR for their details or give your queries to HR and ask them to pass it on. Also ask for a booklet if you don’t have one already so you can read up on the benefits provided by the scheme.

I’m not going to even attempt answering your first question as it’s all to do with the rules of your scheme. If you could clarify whether your pension scheme is Defined Benefit or Defined Contribution it might help.

ii) What if I got another job and "paid up" the current pension. ie let it grow while contribute to another. Would I get 1.5 "final salary" from one fund and the same from another one (ie if I started another company pension). Would the new salary affect the final salary of the last job?

The 1.5 times salary is an overall limit set by the revenue. So the combined lump sums from all the Pension Schemes you have been in at retirement cannot exceed this limit. The new salary should not affect the final salary of the last job (I can’t even think of a scenario where it might but there are some strange pension schemes out there).

iii) What I stopped working at 35/40? Would not my "final salary" tax free lump be very small When I "retired" at 60/65? ie, you must work until the last moment to get a decent lump part.

Depending on how long you have been a member of the scheme your benefit may revalue between the date you leave and the date you retire.

iv) What if you got a low-paying job in the last 5 years (just what if) of your working life span and it happened to be 50% less than before, would that mean your 1.5 final salary lump in any or all the funds be affected by what you finished on?

In the case of a Defined Benefit scheme most likely yes, the benefit provided by the scheme you are in would be contingent on salary. But it’s possible that the scheme provides for “maintaining” benefit and if not you could ask for it (though they don’t have to give it to you). What this means is that your benefit can be based on the salary you had before you took the low paying job. To the best of my recollection your revenue maximum benefit can be based on the best salary of the last five years but don’t quote me on that.

In any event I have only given you a taster of the number of “ifs”, “ands” and “buts” which come into play. You really ought to check out www.pensionsboard.ie for general information and talk to your scheme administrator or HR department to get the full and proper answer to your questions.

(Oh yes and you can contribute to more than one Company Pension Scheme during your lifetime just not at the same time).

hamster

Earthhorse,

Thanks for your points above!

Hamster.