If you transfer your pension to a Personal Retirement Bond, your benefits will be moved from your old pension scheme to a pension plan controlled by you. Personal Retirement Bonds (PRBs) are provided by life and pensions companies and tend to involve a range of investment options.
How a PRB works:
Your transfer value amount is transferred from your pension scheme into a PRB
The money is invested in a fund chosen by you – or, if you make no choice, in the PRB's default fund
No new contributions can be made to the PRB
The value of your PRB will rise or fall depending on fund performance
At retirement you will be able to take your benefits from the PRB. Options may include a Retirement Lump Sum, an income for life (annuity), a taxable lump sum and an Approved Retirement Fund
Options for your PRB
After you have taken out a PRB you can:
Transfer to another PRB with a different life and pensions company
Transfer the value of your PRB into a new company pension plan
From the age of 50, you will be able to take early retirement benefits from your PRB. Note that the earlier you take your benefits, the lower your annual retirement income or lump sum benefits are likely to be.
Charges for a PRB
Usually no initial charge is imposed for transfer into a PRB. An annual management charge is likely to be applied by your PRB provider; this could typically be 0.75% or 1% per annum.
Benefits at retirement
At retirement you can typically take a Retirement Lump Sum from your PRB. The balance must typically be used to purchase a guaranteed income for life (annuity), though where the source of the PRB was a Defined Contribution pension scheme or where Additional Voluntary Contributions were made it may also be possible to transfer the balance after the Retirement Lump Sum is taken to an Approved Retirement Fund (ARF) or Approved Minimum Retirement Fund.
Determinants of level of benefits at retirement
A number of factors will influence the level of benefits you may receive from your PRB at retirement. These include:
The original transfer value of the PRB
The investment performance of your chosen fund or funds
The age at which you take your benefits
The level of annuity rates when you take your benefits
Investing your PRB
There are a variety of funds available within PRBs, including high risk, medium risk and low risk options.
In general, the higher risk a fund, the more growth can be expected from it over the long term. However high risk funds are also volatile, and will experience many ups and downs over the course of investment. Low risk funds will be much less volatile, but will also probably deliver much lower long term growth.
It is usually considered sensible to invest on a medium or high risk basis when you are a long way from retirement. Growth is likely to be an important factor in delivering you a reasonable level of retirement benefits, and the length of time to retirement should mean that your fund will have time to recover from market falls.
However when you are closer to retirement it can be sensible to reduce risk. You may wish to consider investing in a “lifestyle fund” which will automatically reduce risk as your indicated retirement age approaches.
Investment return expectations
If you invest in a low risk cash fund, returns are likely to be no higher than prevailing interest rates. If you invest in a high risk equity fund, it may be reasonable to expect returns of 3-5% ahead of inflation. In other words if inflation averages 2% per annum, then returns of 5-7% can reasonably be expected from a high risk equity fund. However higher risk funds will experience years of much better and much worse returns than this broad average would suggest. You may want to find out more about the principles behind saving and investing. These principles are, in general, similar within a pension fund as outside of one.
Annuity rates and their relevance
At retirement you can usually use your pension to buy an income for life, or annuity. Annuity rates are the rates at which life and pensions companies will provide annuities. The level of annuity, or the amount of income, that you receive will be determined by the following 3 factors:
The size of the pension fund that you have accumulated
The annuity rates at the time
Your age when you buy the annuity
Age at which benefits can be taken
Normally, you can take your retirement benefits from a PRB any time after the age of 50. There is no requirement to adhere to the normal retirement date of your previous pension scheme. It is possible to take early retirement before 50 in the event of serious illness. As a general rule, if you intend to buy an annuity, the older you are when you take your benefits, the higher the annuity you will be able to buy, as annuity rates are tiered by age.
Death before retirement
If you die before taking your benefits from your PRB, the value of the fund will be made available to provide benefits for your dependants. Often on death before retirement it is possible to pay out the full value of the PRB to your dependants, tax free. However there is an upper limit to the amount that can be taken tax free – any excess is likely to be used to buy an annuity for your dependants.
Tax on a PRB
In general, PRBs are able to grow tax free.
Contact us for advice on whether a PRB is the right option for you, which PRB to choose, or to set up a meeting with one of our consultants. We can also give you a second opinion on your existing PRB arrangements.