Ruling means greater choice in retirement for buy-out bond holders

Members of defined benefit pension schemes who have their funds sitting in buy-out bonds will now be able to purchase approved retirement funds (ARFs) with the proceeds of their pension fund, following a ruling from the Department of Finance last week.

Up until now, defined benefit (DB) scheme members who had buy-out bonds, which arise when they left a DB scheme to join another company or their pension scheme was wound up, were obliged to purchase an annuity with the funds in the bond, after taking the allowable tax-free lump sum. Given plummeting interest rates, annuities, which pay out a guaranteed income for life, are increasingly seeing as offering poor value to pensioners, with income offered on such products have fallen considerably over the past 10 years or so.

"The Department of Finance has taken a great step forward which ultimately gives greater choice at retirement for anyone in a DB buy out bond," Derek Maguire of Financial Architects says, noting that annuity rates would have been of the order of about 16 per cent back in 1989 - but are now as low as 4 per cent.

The ruling means that those DB members will be entitled to purchase an ARF, which may give them more control over post-retirement income as their funds remain invested. In addition, as Maguire notes, ARFs allow the value of the pension fund to be transferred to next of kin on death, unlike an annuity in which the money doesn’t transfer to estate. However, ARFs do carry investment risk and may “bomb out” over time, unlike annuities which offer a guaranteed income.

Announcing the change Minister for Finance Michael Noonan said the change will be "of particular benefit to those individuals with buy-out bonds whose defined benefit scheme may have been wound up and who had no choice but to accept a transfer to a bond".