A Personal Retirement Bond (PRB), AKA a Buy Out Bond (BOB) is, in my mind, essentially the pension’s equivalent of a waiting room.
An accrued pension benefit from the likes of an old employer scheme is moved in to this waiting room, known as a PRB / BOB, and sits there until you draw the benefits down.
So how did PRBs / BOBs come about, can I invest the funds in a PRB / BOB, how do I draw benefits and why, with the likes of PRSA’s, do they even still exist?
Let’s break these questions down
How did PRB’s / BOB’s come about?
Well in simple terms they emerged because either employer pension schemes are wind up or you leave employment and thus leave active membership of the old employer pension scheme.
In the case of an employer scheme winding up the trustees inform the member of the wind up of the scheme and request the member notify them of where they want funds transferred to. Typically to a new employer scheme (if the trustees of the new scheme are willing to accept the funds in), to a PRSA (if certain quirky conditions are met – see below for the weird stuff) or to a PRB / BOB.
They are approved by the Revenue Commissioners under Section 786 TCA 1997 (if you’re interested), the pro-forma contract is approved as opposed to each PRB / BOB being individually approved.
Can I invest the funds in a PRB / BOB?
Absolutely, the same investment rules applying to an employer pension scheme apply to a PRB / BOB and the same tax advantages, exemption from income tax and capital gains tax also apply, so invest away if you are in a PRB / BOB.
How do I draw down benefits?
A weird rule applied till circa mid 2016 – there are essentially 2 types of employer pension scheme –
Defined contribution schemes;
The employer and possibly the employee make a ‘defined contribution’ amount to a pension scheme for the employee. The defined contribution may be a set amount or a % of salary, what is available at the end of the day, i.e. retirement is a pot of cash to draw benefits – lump sum (based on length of service) and annuity (annual income) or lump sum (25%) and ARF / AMRF with remainder (there is a little more to this but that’s not the focus of this article).
Defined benefit schemes;
This type of pension provides the scheme member with a ‘defined benefit’ at retirement, based on their length of service at retirement, this is typically defined as a pension of 1/60th of salary for each year of service up to a maximum of 40/60ths of salary, and aa reduction in the annual pension if a lump sum is taken, normally measured in terms of 3/80ths of salary up to a maximum of 120/80ths (there is a lot more to this but that’s not the focus of this article either).
Strangely up until mid-2016 if you took a transfer from a defined benefit scheme to a PRB / BOB you were limited to taking the benefits in the form of the annual income and lump sum based on service. This was completely at odds with what choices you had if you moved from a defined contribution scheme where you could go this way or the 25% / A(M)RF route.
I can only assume that there was a fear that there would be a flood of transfers from defined benefit schemes at some stage, and for some reason, which could threaten the solvency of defined benefit pension schemes (which someone at some point circa mid 2016 decided wasn’t going to happen).
As and from mid-2016 you can ‘ARF’ the proceeds of a PRB / BOB regardless if funds came from a DC or DB pension scheme.
& why, with the PRSA product do PRBs / BOBs even still exist?
As mentioned, the PRB / ARF anomaly was corrected in 2016 however there remains still a strange rule re PRSAs which has kept PRBs / BOBs alive.
PRSAs were first introduced under the Pensions (Amendment) Act 2002. The PRSA was hailed as the product that would do away with the Personal Pension Plan (RAC) and the Personal Retirement Bond / Buy out Bond, both products would effectively become obsolete going forward. However, Section 122 of the Pensions (Amendment) Act 2002 never came in to force, so PRBs / BOBs have never actually been outlawed.
Section 122 states ‘replacement of buy-out bonds’ – (1) Notwithstanding anything contained in this or any other enactment, a person may not effect a policy or contract of insurance of the kind formerly approved by the Revenue Commissioners for the purpose of receiving payments from retirement benefit schemes approved under Chapter 1 of Part 30 of the Taxes Consolidation Act, 1997, and any such policy or contract which is purported to be entered into after the commencement of section 3 of the Pensions (Amendment) Act, 2002, in respect of this section shall be void.
Why? Well you have another anomaly commonly referred to as the ‘15 year rule’ (I would argue it is not actually a rule, but that’s a discussion for another article) contained in section 772 (3D) that can prohibit a an individual transferring accrued benefits from an employer pension scheme to a PRSA when the individual has been a member of a scheme for more than 15 years – so where can it go? A new employer scheme or if no new employer scheme exists……………..yep a PRB / BOB.
Where can you transfer a PRB / BOB in the future?
Broadly speaking an existing PRB / BOB can be transferred to either of the following;
– A new PRB / BOB
– A new employer scheme
However, the 3rd anomaly with PRBs / BOBs arises when you try to transfer a PRB / BOB to another other jurisdiction other than the UK, for some strange reason this appears to be impossible unless you transfer to a PRSA or a new employer scheme first.
Author: Paul Murray is a Director at Quest Capital Trustees, www.qct.ie, 9 Fitzwilliam Square, Dublin 2