Question 3.1: At what age is normal retirement pension payable?
Question 3.2: How does a defined contribution scheme work?
Question 3.3: How are defined contributions schemes financed?
Question 3.4: Can I cash in part of my pension?
Question 3.5: What are my choices when it comes to buying an annuity?
Question 3.6: I would like to aim for a particular level of pension. How can I do this in a defined contribution scheme?
Question 3.7: How are benefits taxed?
Question 3.8: Can I retire early from a defined contribution scheme?
Question 3.9: What happens if I retire late?
Question 3.10: What happens if I die before retirement age?
Question 3.11: What happens if I die after retirement?
Question 3.12: Who gets my death benefits?
Question 3.13: How are my death benefits treated for tax purposes?
Question 3.14: What are my options on leaving service?
Question 3.15: What scope is there for me to pay additional contributions?
Question 3.16: Have I any say in how my fund is invested?
Normal retirement age is exactly the same under defined contribution schemes as it is under defined benefit schemes (see question 2.1).
Unlike a defined benefit scheme, where the rules promise you a specific benefit on retirement at normal retirement age, a defined contribution scheme does not make such a promise. Instead, what you are promised is a fund which is made up of the proceeds of the investment of contributions paid on your behalf by your employer, together with whatever contributions you make yourself. All of the contributions, plus whatever they earn, make up the assets of this fund. Such a fund does not pay any tax on its income and, when you come to retirement age, it provides a capital sum which the trustees will use to provide your benefits. The guaranteed contribution which the employer will pay on your behalf (the "defined contribution") may, or may not, include the cost of death benefit. Sometimes this is paid for in addition to a defined pension contribution; in other cases, your death benefit is a first charge against the total contribution being made.
Sometimes, the overall payment being made by the employer will also include premiums payable under a Permanent Health Insurance scheme (also called an Income Continuance Plan) designed to give benefits in the event of prolonged disability. This is not a part of the pension scheme and is not the responsibility of its trustees.
At retirement, under a defined contribution scheme, you have a great deal of flexibility in planning your retirement benefits. Subject to Revenue limits (which govern the maximum amount that you can receive in cash, for example), the choice as to what you take in cash, what you take as personal pension benefits and what is provided by way of dependants' benefits on death after retirement is up to you to decide.
Generally speaking, the first step in the financing of a defined contribution scheme is to fix the amount of the employer's contribution. As already stated, this might be fixed to include the cost of death benefits. Then the question of any agreed level of
contribution from employees must be considered. Employers' and employees' agreed contributions will be the core payments to the defined contribution scheme. Members may make additional voluntary contributions (AVCs) on top of this.
The contributions are invested, usually in insurance contracts or unit trusts. Occasionally, they may be invested in a directly invested fund. Whichever investment medium is chosen, the contributions appropriate to each member are individually "tracked", which means that the capital sum appropriate to each person can be easily identified at any time during their membership of the scheme, and at retirement age.
Yes, if the rules of your scheme permit it.. The rules applying to benefits payable in lump sum form are exactly the same under defined contribution schemes as under defined benefit schemes (see question 2.3). In a defined contribution scheme, you are dealing with a capital sum and, once the amount of your permitted cash benefit is ascertained, the balance of the capital sum must then be used to provide an annuity or annuities for yourself and possibly for your dependants - unless you are a 'Proprietary Director'. For an explanation of "annuity", see Question 3.5 below and the Glossary.
In a defined contribution scheme the choice can be very wide indeed. Where benefits are payable in pension form, there is really no choice but to purchase an annuity. Usually, regardless of where the capital fund has been built up, there will be an "open market" option, which means that the fund can be taken to any insurance company so that you can obtain the benefit of the best rates available on the market at the time you retire. Annuity rates can vary from one company to another and from day to day. They are influenced by current long-term interest rates, by the insurance company's view on life expectancy, and by commercial considerations within the company itself. It can pay to shop around, and pension scheme trustees have an obligation to do this on behalf of their members.
There are various types of annuity:-
* Single Life - this is an annuity on your own life only. It will cease to be payable when you die, unless, in setting up the annuity, you purchased a minimum guaranteed period of payment (see "guarantee" in the Glossary).
* Joint Life Annuity - this means an annuity which is payable during the lifetimes of both you and another person (for example, your spouse). It can be designed to be paid in full for as long as one of you is alive, or it could be bought on the basis that it reduces in the event of the death of one of you.
* Post Retirement Increases - annuities can also be bought with a built-in escalation factor, so that you would receive automatic increases during the time the annuity is payable.
In recent years "with profit" annuities were available. These are annuities with a guaranteed element of income, but also giving a variable element that will alter - upwards or downwards - depending on the profits declared by the insurance company. Unit-linked annuities are also sold, which give the possibility of extra payments depending on the performance of a unitised investment fund.
Most annuities are sold without any medical evidence being asked for. The insurance companies operate on the basis that those for whom annuities are bought will enjoy the average life expectation of people of their age and sex. However, for those who suffer from certain serious illnesses, it is possible to buy an "impaired life|" annuity. This means that special favourable terms are given to people whose life expectation is probably shorter than average, as a result of serious illness.
What all of this means is that you have a great deal of flexibility about the precise way in which your benefits are set up at the time you retire. They can literally be tailored to suit your own circumstances, but always subject to the overall limits imposed by the Revenue Commissioners.
Don't forget also that there are numerous providers of annuities in the market and you and the trustees of your pension scheme should take expert advice before coming to any final decisions on where the annuities are bought.
It is impossible to guarantee in advance any particular level of pension from a defined contribution scheme. This is because the final capital fund available to you will depend, not only on the contributions made, but on the investment income and capital growth achieved on those contributions while they are in the pension fund. Added to that is the fact that annuity rates do fluctuate. As it would be impossible to predict these with any certainty, years in advance of your retirement, it is not possible to target very accurately for any particular level of pension.
Having said that, it is possible on the basis of professional advice to arrive at an appropriate level of contribution for any particular target benefit, using assumptions in relation to investment returns and future pay increases. There will be no guarantee of reaching the target but it may be possible, over your lifetime in a pension fund, to make some corrections to the rate at which the pension is funded, in order to stay close to the target and compensate for fluctuations in investment returns. The most important thing here is that advice is needed, and you will need to make sure that the target is kept under regular review.
See the answer to question 2.4.
Yes. The Revenue Commissioners' rules on early retirement apply equally to defined benefit and defined contribution schemes. However, in a defined contribution scheme, instead of having a specific benefit reduced because of early payment, you would simply have available to you whatever is the capital value of your particular share of the fund at the point of early retirement. After taking whatever cash is appropriate, the balance would be applied to the purchase of an annuity. Don't forget, the younger you are when an annuity is bought, the smaller the annual payment is likely to be.
Subject to your scheme rules, you may take your early retirement benefits at any time due to ill-health, or after the age of 50 in other circumstances. See question 2.6.
Question 3.9 What happens if I retire late?
Subject to your scheme If you remain employed after Normal Pension Date, be careful. Your beneftis don't automatically increase. You may wish to look at the way your fund is invested, and take steps to protect it from fluctuations in market values. the value of you fund and the state of annuity rates when you actually retire will decide what pension you receive.
You can also explore the option of taking your benefits before you actually retire.
This topic has been dealt with in detail in question 1.9 under the heading of defined benefits. However, there are some features which are peculiar to defined contribution schemes, as follows:-
* The lump sum death benefit may be available to the trustees as a separately insured amount, in addition to the fund of money that secures your retirement benefits.
* Sometimes, a lump sum death benefit may be expressed as a multiple of salary, e.g., 3 or 4 times annual pay, which may include the total fund of money which represents your retirement benefits.
* It is less usual for dependants' benefits to be provided in pension form from defined contribution schemes than it is from defined benefit schemes. Where dependants' benefits are provided in pension form, they will normally be expressed as a percentage of the salary on which contributions are based, rather than being related to your own pension entitlement. From the previous questions in this section, you will realise that your own pension entitlement is not defined and it would not therefore be possible to define a dependant's pension in terms of your own entitlement.
The rules of your own pension scheme will specify how exactly your death benefit is determined, and what limitations exist on the manner in which it can be paid.
In defined contribution schemes there is no specific provision for payment to be made to dependants on your death after retirement. Any guaranteed period of payment of your own pension, or any dependant's pension to be paid after your death, must be arranged by you at the time you retire, out of the total fund of money available for retirement provision.
See question 2.11.
See question 2.12.
The options that you have on leaving service are the same as those described in questions 2.13 and 2.14.
In defined contribution schemes, the preserved benefits applicable under the Pensions Act are defined as being the value at the date of leaving service of the contributions paid by you and on your behalf during your membership of the scheme. Preserved benefits from defined contribution schemes are not subject to revaluation between the time of leaving service and the date of eventual retirement. If you leave them in the scheme, they will simply continue to be invested, and you will benefit from any growth in the investments.
In a defined contribution scheme, if you request a transfer value, the trustees have power to fix the date on which the transfer value is calculated, since the value of the investments representing your benefits can change from day to day - it does not become fixed just because you leave service.
Within the general limits placed by the Revenue Commissioners on benefits and contributions (described in Section 5) there is a good deal of scope for a member of a defined contribution scheme to pay extra contributions. Sometimes, defined contribution schemes are set up on the basis of a fairly basic contribution rate from the employer. The limits set by the Revenue Commissioners on benefits will usually allow a person in such a scheme to make the maximum personal contributions allowed by law. See Section 4 - AVCs, also questions 2.15 (b) and 2.16.
In general, scheme members, particularly those at younger ages, who wish to make large additional contributions, should always check that the benefits which result from making these contributions, when added to the benefits under the main pension scheme, are likely to be within the overall benefit limits imposed by the Revenue Commissioners. See Section 5.
You should also note that one of the conditions imposed by the Revenue Commissioners is that the employer must make a substantial contribution to the total cost of benefits under the scheme if the scheme is to be approved for tax purposes. This test must be met on a year-by-year basis in a defined contribution scheme.
This depends upon how your scheme is run by its trustees. You should bear in mind that the trustees have the ultimate legal responsibility for the investment of every pension fund but it is fair to say that it is the scheme member who carries the investment risk in a defined contribution scheme. Trustees may therefore be willing to allow each member to have some say in the investment of that part of the fund which represents his or her benefits. You do not have an automatic right to such consultation, because the legal responsibility belongs to the trustees.
The Pensions (Amendment) Act, 2002, allowed trustees to transfer this legal responsibility to the member, under very strict conditions. At the time of writing, there is no evidence that this has happened on any significant scale.
Very often, trustees will give scheme members a range of options - for example, a deposit or a cash fund and some sort of mixed fund with a variety of different investments in it. The degree of risk attaching to each of these funds will be different. A cash fund is likely to give a steady (but possibly low) rate of return. A mixed managed fund may give returns that fluctuate widely from year to year and show no regular pattern of returns. On the other hand, over the longer term, the returns from such funds can be attractive. Often, investments that involve low risks also involve low returns, and vice versa.
With this in mind, it is clearly not appropriate for an older person, fairly close to retirement, to invest in a fund that is likely to show very volatile returns. This approach might be appropriate for a younger person. As the member gets older, gains made from these forms of investment can be realised and consolidated into a deposit or cash fund, where at least the value of the investments is unlikely to go down, something which is always possible with investments based on stocks and shares.
This is an area where it is really impossible to generalise and you need to seek detailed expert advice. The important thing here is to make sure that your scheme trustees or administrators give you the information you will need in order to get meaningul advice on investment matters. And do not try to instruct the investment manager yourself - instructions to change investments should be given by the trustees of the scheme, or by the administrators as their agent.