Defined Benefit Pensions: Five Key Questions Every Member Should Be Asking

Can My Defined Benefit Pension Be Reduced?

Defined Benefit (DB) pensions are often seen as the gold standard of retirement planning — especially for those in the public sector — but that doesn’t mean they are risk-free. If you have a DB pension, you’re entitled to an income for life. Yet, as economic, demographic, and regulatory landscapes shift, it’s more important than ever to understand the moving parts behind these schemes. In this article, we address the critical question: Can my Defined Benefit pension be reduced? Alongside that, we explore five essential questions all DB pension members should be asking today.

1. How Likely Is Your DB Scheme to Remain Solvent for Life?

Ireland has witnessed a dramatic decline in DB schemes — from over 22,000 in 1996 to fewer than 600 today. Why? The answer lies in rising costs:

• Longer life expectancies have increased liabilities beyond original projections.
• Tighter regulatory oversight has added further financial obligations.
• Persistently low interest rates have increased the cost of providing a guaranteed income.

Many employers are less willing to plug funding gaps. While public service pensions may enjoy stronger backing, DB schemes tied to private companies carry the risk of default — Waterford Wedgwood Plc being a notable example. In short, DB pensions are not infallible. If a scheme is underfunded and the sponsoring employer cannot bridge the shortfall, benefits can be reduced.

If your scheme is underfunded, this will be reflected in the Transfer Value offered today* – a present-day valuation of your future DB income. However, funding levels can change over time. Ongoing monitoring of both the scheme and employer’s financial health is crucial.

*It is also important to note that pension trustees are under no obligation to allow for transfers out of a DB pension scheme and may refuse to do so, though in our experience, this is rare.

2. What Income Will Your Family Receive If You Die Prematurely?

While many DB schemes offer a reduced survivor’s pension for your spouse (often 50% after an initial full payout for 5 years), benefits typically cease after both spouses have passed away. No residual value passes to your estate.

If you or your partner have a life-limiting condition, or there’s a history of premature death in the family, transferring your DB pension could result in significantly more value passing to your beneficiaries.

3. How Much Personal Income Tax Will You Pay in Retirement?

DB pensions provide certainty in gross income, which supports effective retirement budgeting. However, income tax planning is often overlooked. Once your State Pension kicks in, the combination may push you into the higher income tax bracket (currently 40%).

Taking a Transfer Value could allow you to extract a large, tax-efficient lump sum today (25% tax-free after age 50) and manage your future income more strategically, potentially reducing your total tax burden over retirement.

4. At What Age Will You Receive Your DB Pension, and What Lump Sum Can You Expect?

If you’re years away from your Normal Retirement Age (NRA), you might prefer immediate access to funds for projects or debt repayment. Accepting a Transfer Value today may yield:

• A larger tax-free lump sum now compared to what’s available at NRA.
• Greater financial control and flexibility.
• Lower lifetime tax liability.

This is not a one-size-fits-all solution, but the benefits of early access and strategic planning shouldn’t be dismissed.

5. What Is the Current Transfer Value of Your DB Pension?

Obtaining your Transfer Value lets you:

• Quantify your current tax-free lump sum entitlement.
• Move your pension to a Defined Contribution (DC) arrangement in your name.
• Gain control over investment choices and succession planning.

Understanding Transfer Values

Since Revenue eBrief No. 72/16, DB and DC members have similar options when it comes to accessing their pensions. Low global interest rates have further inflated the Transfer Values being offered. Why? DB trustees rely on bond purchases to match future liabilities, and when interest rates are low, bond prices rise – increasing the capital needed to fund those promises.

To illustrate: if you were offered €3,000 in annual income from age 65, a Transfer Value of around €100,000 might be needed today to match it — assuming a 3% annuity rate. It is worth noting that annuity rates have improved somewhat in recent times however they are still significantly less when compared to the typical rates provided 15 years+ ago, where a €3,000 annual income might only have required an initial outlay of €30,000 to €40,000.

The Main Risk of Accepting a Transfer Value: Bomb-Out Risk

Taking control of your pension means you shoulder investment and longevity risks. Without careful planning, there’s a risk of depleting your funds too soon. Lifestyle, withdrawal strategy, and market returns all play a role. A prudent investment approach, built with your Certified Financial Planner®, is essential to mitigate this risk.

What Are the Advantages of Taking a Transfer Value?

While transferring out of a DB pension isn’t for everyone, potential advantages include:

• Immediate access to 25% of your Transfer Value as a tax-free lump sum (from age 50).
• Full control over your investment strategy, including property or ESG-focused portfolios.
• Potential for lower personal tax over your retirement.
• The remaining fund passes to your estate on death.
• Flexible access to additional funds in retirement.

Final Thoughts

You don’t need to rush into a decision, but timing is important. Once your DB pension is in payment, the option to transfer to a DC pension in your name will likely disappear. Interest rate changes can also affect your Transfer Value significantly (as a rule of thumb, while there are of other variables, the lower the interest rate, the higher the Transfer Value).

We recommend speaking with a Certified Financial Planner® to assess your current scheme, your future needs, and whether a Transfer Value could support your long-term financial goals. Get in touch with us, if you would like to discuss your situation.

You may find that the greatest value in your pension lies in making informed decisions – while you still have the option.