Private sector workers may have Defined Contribution (DC) pensions, and many still hold Defined Benefit (DB) entitlements from older employment or closed schemes.
Defined Contribution (DC) Pensions – Employer Sponsored
Your pot is contributions + employer contributions + investment growth.
Options at retirement:
- Tax-Free Lump Sum (€200,000 max).
- Approved Retirement Fund (ARF) for flexible income and subject to income tax
- Annuity for guaranteed income and subject to income taxes.
Most people will opt to make Additional Voluntary Contributions (AVC’s) to enhance their final retirement pot. They are usually in the form of a percentage contribution out of your monthly salary. Please note that the applicable level of tax relief is age dependent. See table below
Case Study – Emma
At 45, contributes €400/month AVCs. At 65 → ~ additional €160,000 fund. (assumes 5% investment return)
- Potentially adding to €40,000 to lump sum
- €120,000 to ARF – potentially €4,800/year (@4% pa)
Defined Benefit (DB) Pensions in the Private Sector
Defined benefit pensions are where your retirement benefits are based upon your salary and your length of service. Whilst the ability of the scheme to be able to pay these benefits is based on an underlying set of investments, the proposition is that the employee is shielded from this volatility. They’re an incredibly valuable part of anybody’s retirement planning portfolio.
However it must be noted that employee expectations regarding certain benefits at retirement sometime have been altered unfavorably due to either the incapacity of an employer to continue funding, a very unfavorable investment market performance or a combination of both. In short, a Defined Benefit pension from the private sector should always be labeled as a promise not a guarantee.
Typical Formula
- Annual Pension = Number of Service Years × Final/Notional Salary ÷ 80
- Tax-Free Lump Sum = Number of Service Years × Final/Notional Salary × 3 ÷ 80
Example – Retained DB Pension
John worked 20 years, salary €60,000. Deferred until 65:
- Pension = (20 × 60,000) ÷ 80 = €15,000/year.
- Lump Sum = (20 × 60,000 × 3) ÷ 80 = €45,000.
If limited indexation, inflation may reduce real value.
Illustration purposes only. Some scheme’s will also take into account State Pension benefits, use 1/60th as a divider or have other scheme specific calculation factors, so please make sure to consult with your benefits provider for an accurate projection of your benefits.
Transfer Values for DB Pensions
Instead of waiting for DB benefits at retirement date members may be offered a transfer value — a lump sum that can be moved into a PRSA.
Example – Sarah
Deferred DB pension = €10,000/year. Transfer value = €250,000. She can move this into a PRSA or Personal Retirement Bond and manage it herself.
Pros & Cons of Taking a Transfer Value
Pros:
- Flexibility and control over investments.
- Fund passes to heirs/death benefits
- Tax planning opportunities.
- Potential growth.
Cons:
- Loss of guaranteed income.
- Investment Market and longevity risk.
- More complex to manage.
Key Takeaway
DC pensions offer flexibility but risk. DB pensions offer security but rigidity. Transfer values can be powerful but require very careful analysis. It is critical you get financial advice prior to making any such decisions.
