Defined Benefit Pension Ireland

Everything you need to know

Defined Benefit pensions give employees a fixed pension payment each year in retirement for the rest of their lives.

Employees may pay into a defined benefit company pension scheme set up by their employer, which in turn provides income in retirement to ensure that their standard of living is maintained into old age.

Table of Contents

What is a Defined Benefit (DB) pension?

A Defined Benefit pension scheme is set up by an employer to benefit an employee and represents a fixed (defined) payment each year that an employee will receive once they retire.

These occupational DB pension schemes and the amount of pension an employee receives in their pension pot is based on their salary and the number of years they were in employment.

If a person’s salary increases or decreases during their employment, the amount that will be paid into their retirement will also increase or decrease.

How Defined Benefit Pensions Are Calculated in Ireland

The amount you receive in retirement under a defined benefit pension will depend on the number of years you have contributed to your company pension scheme and your earnings at the time of retirement.

The contribution rate in a defined benefit pension is fixed (i.e. as a set percentage of a salary) and the employer rate usually increases or decreases as needed throughout the scheme’s term.

Should you transfer your defined benefit pension?

Transferring your defined benefit pension is a personal decision with pros and cons. These are some of the main factors to consider when thinking about transferring your DB pension.

Benefits of Transferring

  • You may be able to access 25% tax free as a lump sum at age 50
  • You have control over where and how your pension is invested
  • In the event of your death, your pension is easier to pass on to your loved ones
  • If the employer who manages the DB cannot make repayments your money is secure

Drawbacks of Transferring

  • You are taking on additional responsibility
  • Certain schemes may have exit fees
  • Finding good pension advisors can be a challenge
  • Loss of benefits in existing DB scheme (such as disability benefits)

What are the DB Pension Tax and Revenue Rules

Defined Benefit pensions are taxed in retirement, being liable for income tax at your marginal rate, PRSI, and USC. However, there are also some important tax advantages to bear in mind when considering defined benefit pensions:

  • From 60 (or in certain cases 50), you may qualify for a tax-free lump sum of up to 25% of your pension value. However, taking a lump sum lowers the fixed amount you receive in retirement.
  • Pension contributions made during your working life typically attract tax relief which helps to lower the cost of saving for retirement.

Pension Transfer Eligibility Assessment

Take our 90-second pension transfer assessment and one of our central bank regulated pension advisors will be in touch to determine your eligibility and discuss your various options

Can you cash in a DB pension?

In Ireland, you can cash in your defined benefit pension early from the age of 50 (if you have left employment) or, in most cases, from the age of 60. Early access to your defined benefit pension usually involves transferring your pension to another arrangement which allows you to take up to 25% of the pension value as a tax-free lump sum. This is subject to Revenue limits. 

Taking a lump sum from your DB pension will reduce the amount that you receive in retirement, however many people opt for this option to pay off loans, their mortgage, or send their children to college.

Defined Benefit vs Defined Contribution

There are some key differences between the two main types of occupational pensions in Ireland. 

Defined benefit pensions, where you receive a fixed income for life, are based on your contributions as a percentage of your salary and will depend both on your salary and the number of years you have worked.

A Defined Contribution pension is a personal pension that is built from contributions taken from your salary and usually boosted by employers.

These contributions are invested in a pension fund, which will hopefully grow over time to provide enough income in retirement. 

Unlike DB pensions, the benefits you receive when you retire are not fixed, and are dependent on the value of the contributions that you and your employer have made and the performance of your investments.

Advantages and Disadvantages of DB Pensions

  • Tax relief
  • Fixed income for until you die
  • Employer contributions
  • Tax-free lump sum

  • Benefits are not absolutely guaranteed. (If the scheme’s assets are not sufficient to pay the benefits, and the employer is not in a position to meet the shortfall, promised benefits may have to be reduced.)

DB Pension Case Study

John is getting ready to retire. He has worked at the same accounting firm for 30 years paying into a DB / final salary pension scheme each month.

The company’s pension scheme accrual rate is based on paying 1/80th for each year of membership of the scheme.

At retirement age, his salary is €80,000, which means that he will receive a pension of €30,000 a year.

To reach this number you take the number of years, divided by the number of total percentiles, multiplied by the salary amount (30/80 x €80,000 = €30,000).

Note: This is a simplified example to illustrate the way in which the final pension amount can be predicted. See our defined benefit pension calculator for more information.

FAQs

If you leave your job, your pension will usually become deferred. This means that it stays in the scheme and pays an income from retirement age, based on your service and salary to date.

When you leave a DB scheme, the pension you have earned to date is preserved and you won’t lose it. Your pension remains payable when you retire, subject to the rules of the scheme.

Sometimes, but not always. Transferring can give flexibility and lump-sum access, but professional financial advice is always strongly recommended.

Pension Transfer Eligibility Assessment

Take our 90-second pension transfer assessment and one of our central bank regulated pension advisors will be in touch to determine your eligibility and discuss your various options