Creating a pension plan and managing it are two completely different things, and quite often, we wonder if there could be something better out there, something that our financial advisor may have missed or overlooked. While the probability of the latter being true is slim to none, it is always a smart thing to be aware of every option that exists.
If you are looking to transfer out of your current defined benefit pension, this article will help you decide. However, if you are merely thinking about a transfer and are not sure either way, this is a perfect read.
Before talking about why one should switch out of a defined benefit plan, it is essential to understand what it is. Simply put, a defined benefit plan is one in which the goal is fixed beforehand, and the investment plan is built around this goal. By the way if you understand the details of a defined benefit pension, Ireland can be the best country to offer a pension plan.
If a defined benefit plan is goal-based, why should you transfer out of it?.
• You’d rather receive a lump sum payment than monthly payouts.
In the case of a defined benefit plan, you get to plan for the exact amount (or as close to it as possible) that you would receive in terms of your pension plan. However, this amount is paid in monthly installments, and if you choose to receive it in a lump sum transaction instead, you would have to pay some penalty charges (assuming that such a clause even exists in your contract).
Did you know that roughly 33% of all workers have opted for a defined pension plan from their current job?
By opting for a different plan, such as a defined contribution plan, you create an opportunity for yourself by becoming eligible for receiving a lump sum payment at the time of your retirement.
• Let your ability to invest dictate the pension goal
If you’re more concerned with the amount of money that needs to be invested and want more autonomy in that aspect, then transferring from a defined benefit plan is the sound thing.
A characteristic feature of the defined benefit pension plan is that it calculates the investment amount based on the pension goal that you have set. Since your current investment hinges on that goal set in the future, there may be instances where you need to pay more or less than the previously planned amount depending on how a particular variable gets affected.
In a pension plan that does not cater to this future goal, there will be no fluctuations in the amount, and in many cases, you can increase or decrease this amount based on your personal preferences rather than any mandate that can catch you unawares.
• The benefit of getting an Enhanced Transfer Value (ETV)
An enhanced transfer value is a tool used to incentivize investors from one scheme into another by offering better terms than the previous plan.
If you are someone who would want their retirement goal to be greater than what it is, then transferring your pension from one plan to another is quite a smart idea and works best for those individuals who are soon nearing their retirement.
Another factor that needs to be considered is the enhanced transfer value offered by various pension providers. This is an amount of money that is either paid at the time of the transfer or paid at the time of retirement.
Many institutions offer such an amount so that the pensioner is incentivised to invest in the fund that the financial institutions believe isn’t receiving as much investor attention as had been anticipated.
Incentives are good but should always be viewed with a discerning eye. If you know how a particular incentive will benefit the institution, you’ll also know whether or not their interests align with yours. Armed with this knowledge, you can choose to transfer into a fund that will take good care of you in the future and give out good returns in the short run.
There are many pension plans, and go through them all before deciding one way or another.