23/08/2018 0 Comments
DB v DC
What are the main differences between “DB” and “The Approved Retirement Fund route after taking 25% tax Free”?
|Features of an Defined Benefit||Features of an ARF|
|Income for life||This offers an income for life which is guaranteed. Usually for a period of 5 years and thereafter 50% of Members pension to spouse for his//her lifetime. Thereafter ¼ to each child if they are dependant or in full time education.||No guaranteed income for life, subject to withdrawals (minimum 4%from age 61 years /5% from age 71 years*) annually.|
|Access to Fund||You do not have access to your fund.||Yes, Full Access permitted subject to Min withdrawal.|
|Control/Risk||You do not control the investment decisions and therefore the Investment risk is the responsibility of the DB Pension Fund Manager||You control the Investment decisions and make decisions on where the fund is invested, and you appoint Fund Managers to manage the Investment Risk on your fund.|
|Flexibility on amounts of Income||No flexibility, you cannot make changes to your annual income, once Defined Pension Benefit is in payment.||Flexibility to withdraw how much you wish to annually, subject to the minimum of 4%/5%*, Automatic Payment facility allows up to 10% pa. Larger amounts can be taken in particular years if required.|
|Potential for future growth?||None, you are locked into a set rate. Your DB Pension has CPI increases that apply so that your Pension stays up to date with Inflation. Investment Risk is on part of Employer||You might benefit from future growth if your fund is invested in suitable assets, Conversely the value of your fund could also fall in value.|
|Features of an Annuity||Features of an ARF|
|Potential for fund to be drained/be exhausted?||The Defined Benefit guarantees to pay you your pension for your lifetime and thereafter 50% of your pension to your Spouse.||You need to plan carefully how the funds are invested to ensure the maximum longevity of the funds. |
It is important to invest in diversified portfolio that has the ability to generate the necessary annual you need.
If you take a greater Annual income than the fund is achieving then your AMRF/ARF will reduce over time and could deplete. This will depend on your annual withdrawals versus your investment strategy.
|When death occurs?||Income stops when you die and payment of 50% of members Pension is payable to your spouse.||Full value of remaining AMRF/ARF go to your next of kin. Transfers between spouses are free of any taxes.|
|Fund Manager Risk||Some DB Pensions have significant liabilities are whilst are presently being Funded by the Employer, there is no guarantee that the entity will continue to fund the Pension Scheme deficit.||Your AMRF/ARF will be invested with a Life Assurance Company. It is important to ensure that the Life Assurance company is of a sufficient Credit Rating to mitigate against the risk of such an entity failing.|
|Deferred Member Risk||Under DB schemes, the Employees or Members who have already retired are presently being paid their Annual Pensions. Deferred Pension Members i.e. those who have left the Employment and are “waiting to receive their Pension” in the future are “next in line” to the already retied members in the event of liquidity issues facing the DB pension scheme.||Not applicable as when a member takes a transfer value they take over control and access to their Fund when they take a transfer value.|