Making the most of your personal retirement bond

John Lucey explains the need for expert advice when it comes to Personal Retirement Bonds.

Many individuals have pension benefits in a Personal Retirement Bond (PRB) without necessarily understanding what they have and what steps they should follow to make the most of these benefits before retirement hits them – often too late to do anything!

Sources – DB + DC

A PRB is an individual pension contract designed to invest pension benefits which have been accrued in an Occupational Pension Scheme of an employment which the individual has left.

For members of a Defined Contribution (DC) scheme who decide to transfer their benefits to a PRB the options available at retirement are the same under both the scheme and the PRB. Up until recently, the vast majority of PRBs originated from such schemes.

The situation has been somewhat different for defined benefit (DB) schemes, however. When members left these schemes their benefit was guaranteed and so they typically left the benefit they had accrued “deferred” in the scheme until retirement.

However, many DB schemes have become unsustainable in recent years and trustees have often made the decision to wind-up schemes and transfer the assets of current members to defined contribution arrangements. For those holding a deferred benefit in a DB scheme this typically meant the benefit transferring to a PRB.

A PRB for a member transferring from a DB scheme is a major change as the guaranteed fixed benefit at retirement is gone and the member must take on the responsibility for the investment risk. Choosing an appropriate strategy for investment can significantly affect the outcome at retirement.

Change in rules for Defined Benefit PRBs

From June 22, Revenue practice for retirement options on Personal Retirement Bonds from Defined Benefit (“DB PRB”) has changed.

Previously, DB PRB holders had to take benefits under the ‘traditional’ formula of:

•  a lump sum based on salary and service and
•  the remainder to purchase an annuity.

However DB PRB holders now have access to the ‘alternative’ retirement options which allow for:

•  a lump sum of up to 25% of the fund to be taken and
•  the remainder to be invested in an Approved Retirement Fund (ARF) or an Approved Minimum Retirement Fund (AMRF), or to purchase an annuity.

This is a welcome change and ensures that going forward all PRB holders will have access to the same suite of options on drawdown as those available to DC PRBs.

For some, particularly those with long service, it may still be best advice to use the salary and service rule when drawing their retirement benefits, however with annuity rates at record low levels, many individuals holding a PRB should now give serious consideration to the alternative option which avoids purchasing an annuity and gives flexibility in terms of income drawdown which can be planned based on individual needs.

Unfortunately, when an annuity is purchased for the rest of an individual’s life it is based on the rate available on the day of purchase – regardless of the fact that rates may increase over time if interest rates rise. An ARF, on the other hand, delivers a return based on market performance as time goes on rather than at a single date.

The options available to individuals can be complex but you only get once chance to make the right decision for you and so it is absolutely essential to take professional advice before making any decisions.