Changes In The Valuation Method Of Defined Benefit Pensions

Guest Blog by Steven Barrett of Bluewater Financial Planning.

The method of valuing defined benefit pensions changed with effect from 1 January 2014. Previously, a capitalisation factor of 20 was used to value a defined benefit pension e.g. a pension of €50,000 was valued at €1m. It didn't matter whether you retired at 60 or 70, the value of the pension fund was the same as far as the Revenue were concerned.

From 1 January 2014, the capitalisation factor has been altered depending on age. For example, a pension paid at age 60 is valued at 30 times the benefit paid while a pension paid at age 65 is valued at 26 times the benefit paid. This new method of valuation applies for pension benefits accrued from 1 January 2014. The old system still applied to benefits accrued before then. There is a catch.

The old valuation system for pre 2014 benefits only applies where 'the scheme administrator is satisfied, based on information and records available to the administrator, that there is an accrued pension amount in respect of that event'. In other words, you need to be sure that your scheme administrator has a record of your benefits as at 1 January 2014 or has a system that can roll it back to that that. If they don't, the new rate applies for the entire pension. For some, this might result in going over the €2m maximum fund threshold and a large tax bill.

For a lot of cases, this will mean relying on accurate records being kept for decades. Who knows who will be looking after your pension benefits when you come to retire. Do you want to rely on someone else keeping the correct records being kept for that long? Both current members and deferred members of defined pension benefits should request a statement of benefits as a 1 January 2014 or as near to that date as possible. This is especially important for people with deferred benefits as they don't get benefit statements at all.

If you are interested in discussing this further, please contact Steven Barrett of Bluewater Financial Planning.

If this article helped you, please share it with other businesses.