Pension! How will I get it? What will be the return? Has my pension become a frozen pension? We are sure there are so many questions that cross your mind as you approach your retirement age. We have tried to answer some of the most common questions before. We will continue to post more such questions for the benefit our our readers and general public at large!
Q1. What happens to contributions paid for the pension?
Pension contributions are generally invested by pension plan trustees through an investment manager or an insurance company. The investments are generally made separately for each employee to easily track the fund share for each individual.
Exactly how the contributions are invested actually depends on many other things including the closeness of an employee to his or her retirement age. For instance, if an employee is close to his age of retirement, investment in debt assets takes importance. A younger employee might get the investment made in more volatile assets (such as equities) with a hope to make significant capital gain before he or she wants to consolidate for their retirement. The assets under pension funds can be build up without any payment of tax towards investment income. Therefore, such contribution investments build up faster than other investment funds that are required to pay the taxes.
Q2. What happens at the time of my retirement?
At the time of your retirement, unless you have frozen pension, the entire accumulated fund in your name is made available to the trustee to offer the benefits. The highest benefits that are allowed to be offered are governed by Revenue Commissioner’s Rule. For employees who are retiring at their normal pension date after completion of regular 20 years of service, the highest lump sum could be 1 ½ times of their salary or it could be calculated according to the most favorable description permitted by the revenue Regulations & scheme rules. The balance amount of available fund must be used to purchase further pensions (for the employee or for their dependents).
If the lump sum has been taken, the amount of available fund is dictated by:
- Total value of the accumulated fund
- The annuity cost at the time of retirement
None of the above can be predicted in advance. For an employee who is far away from retirement age, a reasonable estimate based on assumptions of annuity rates & future fund performance is made. It is critical to keep reviewing these rates regularly to know if the performance is in accord to the assumptions. This allows a change to be made in rate of contributions (if required).
Q3. What if I die during service?
If you die during your service period, your accumulated pension fund will make up for the death benefit offered by the pension plan. The calculations are done based on the scheme terms and conditions. Death benefits can be tax-free lump sum payouts within the permitted limits. Any balance will go for purchasing pensions.
Q4. What if I die past my retirement?
It depends on the option you opted for at the time of your retirement to be offered for your dependents. Many people opt for pensions only for their own lives. Some other people may opt to assure that some part of their capital available at the age of the retirement is used for purchasing additional pensions to be paid to their spouse or dependents on death of the employee after retirement. The fund available can be utilized to customize the benefits to befitting your individual situation.
Q5. What are the advantages and disadvantages of defined contribution pension schemes?
Defined contribution pension schemes put many things into the control of the participants. Participants are allowed to decide about distribution of the benefits – personal pension, dependent’s pension, lump sum payouts or increased cost of living.
If an employee leaves the employment early at a young age, defined contribution pension schemes generate generous service leaving benefits for short service period completed by the employee. It’s always advisable to have an active pension plan lest it becomes frozen pension.
But, there are risks involved. There are chances that the returns are poor in which case available capital at the retirement time could be less than you expected.
The second risk is due to the annuity rates. The money can be invested with open annuity market for best value. However, long term interest rates are lower at the retirement time; they may feed into all-life annuity rates. And thus the annual pension fund for given capital amount can possibly be poor. It is recommended to shop around to get best quotations.