Planning points after the Personal Fund Threshold applications. Part 3

The third common query that I want to address in this series of posts is around a guaranteed annuity rate when considering the PFT.

Where a person has a pension with a guaranteed annuity rate in excess of 5%, do you use:

a.    20 times multiplier of the guaranteed sum, or

b.    multiplier based on actual annuity rates as at 7^th December 2010?

For Defined Benefit (DB) schemes the valuation basis provided for, by the legislation, is 20 x Pension. For a Defined Contribution (DC) scheme where the insurance contract contains an entitlement on retirement at Normal Retirement Age (NRA) to a minimum guaranteed annuity rate, a number of questions arise:

1.    Does the existence of the guaranteed annuity rate convert this into a Defined Benefit scheme? In my view the answer is no.

2.    If not, should the contract still be valued using the 20 x valuation system? Again my view is no. Typically market annuity rates will give a better value.

3.    Are market rates the only way to value? No. Consideration should be given to other value options e.g. Discounted cash flow.

If you have any queries on any of the queries raised in this series of blog posts, please contact us on (01) 661 1022.

Aidan McLoughlin