Q&A: Dominic Coyle
Is my pension annuity fully protected?
Your colleague Fiona Reddan in her article on pensions last week did not mention annuities. I retired in 1998 with a defined benefit pension scheme. An annuity was bought for me through a reputable fund manager.
Can I assume my pension is now independent of my former employer’s fund and that it is secure, whatever company pays it?
Mr DB, Dublin
You can. An annuity is essentially an insurance policy that provides for the payment of a set sum each year. At your retirement, your former employer would have paid a lump sum to deliver the income agreed, and that is that.
You no longer have any relationship with the pension scheme: your relationship is with the insurance company and is entirely secure – a fact confirmed by the Pensions Board, which regulates the sector.
Part of the current distress for all pension scheme members – retired and active (working) as well as the deferred (people who have left that employment but have not yet retired) – is that there is no longer any certainty about so much in the pensions scene.
This has not been helped by years of irresponsible dithering by a succession of social protection ministers and governments, including the current administration.
As it stands, anyone who has already retired has absolute priority on the assets of a defined benefit, or final salary, pension scheme, which pays a pension determined by your salary on retirement and your years of service. Only when their agreed pension commitments have been met can the benefits of active and deferred members be considered.
In practice what happens, nowadays, is that most companies offering a defined benefit scheme do not actually buy an annuity for retiring employees. The reason for this is that yields on blue-chip (German) government bonds have been trading at historic lows. This means that the cost per €1,000 of pension was higher than scheme actuaries had provided for.
Companies figured that rather than paying for annuities at top-of-the-market rates, they would meet the pension payments directly from their fund and wait, perhaps, until annuities became more attractive.
That’s okay until a scheme has to be wound up because it is (in effect) insolvent – at least according to the increasingly demanding guidelines set down by the regulator – or a burden on the company’s balance sheet because of the way pensions are provided for under modern accounting standards. At that point, to meet the obligations to pensioners, an annuity is bought, guaranteeing them their income regardless of what happens in the future.
There is growing pressure to address the priority ranking so that pensioners – especially better-off pensioners – would not be 100 per cent protected while other low-paid, long-serving but not yet retired members of a scheme could be left with nothing.
Which brings us back to your case. You, unusually, actually have an annuity and therefore, logically, are no longer a burden on your former employer’s scheme. More importantly, from your point of view, you are fully independent of it: you are paid by the insurer, albeit through your company. That means you are secure.
Part of the Government’s quandary is how to frame legislation that can apply fairly to all parties – ie if it is changing the wind-up priority, can it apply common rules to people holding annuities (100 per cent secure) and those whose employers chose for cost reasons not to do so?
I’m not a lawyer but I suspect the contract law governing the annuity purchase would preclude any government or employer clawing back some of your pension even in those circumstances.
Can parents give tax-free gifts to several children?
Further to your advice in a recent column, perhaps you could clarify the position regarding the small gift exemption.
Does the €3,000 limit apply to each child – eg if a person has four children does it apply to each? Can each parent gift €3,000 to each child?
Mr MT, email
The small exemption threshold does apply to the individual. You can gift each of your four children €3,000 each year without it having to be taken into consideration when assessing each child’s liability to capital acquisitions tax.
In fact, there is nothing to stop you, resources permitting, gifting the €3,000 to neighbours, their children, friends . . . anyone, in fact, as long as the money is for their personal use.
Revenue would, however, be alert to situations where people gifted money to, say, a nephew, who then gifted it to their cousin – ie your child. In that case, the ultimate beneficiary is deemed to be your child and if they have already received the maximum small gift exemption for that year, the additional amount will count towards their threshold.
Can each parent gift €3,000? They can, if it is from their own resources. The same Revenue rule as above would apply if one parent gifted children money they had received from their partner.
This column is a reader service and is not intended to replace professional advice. Please send your questions to Q&A, c/o Dominic Coyle, The Irish Times, 24-28 Tara Street, Dublin 2, or to firstname.lastname@example.org