Question: I am female, 48 years of age and I have been with my current employer for 21 years. For the first 15 years I was a member of the defined benefit pension scheme, but this has now closed and has been replaced by a defined contribution scheme. I have been offered a buyout option of €220,000 on my defined benefit of a pension of €18,000 at age 65. Is there a general metric to assess whether a buyout option is good value?
Answer: There are many variables, so there is no definite answer. If you were retiring now at age 65, you would need roughly €460,000 to buy a pension of €18,000, according to chief executive of the Irish Association of Pension Funds Jerry Moriarty. If your DB pension includes a spouse's pension or annual increases, which many do, then the value may be far greater than €460,000.
You have 17 years to go, so have to consider how much the €220,000 pot could grow to before you hit 65. If you took it now, invested it and it grew by 5pc per annum, you could be slightly ahead at about €504,000, but you would be taking more risk than if you held out for the promised annual pension of €18,000. There is also no way of knowing what the cost of buying an annuity will be at age 65. On the other hand, you also need to consider whether the DB scheme might wind-up before age 65, and the funding level of the scheme. If the scheme wasn't fully funded you might end up having your benefits reduced, Mr Moriarty said.
If you have low tolerance for risk, the prospect of a promised defined benefit might be more attractive, whereas if you are comfortable taking investment risk or have concerns about the future funding of the defined benefit scheme, then maybe the buyout option is for you. Get independent financial advice before making your decision.
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