Actuarial reduced early retirement pension

[mendacity]

Hi, I am looking at this option to retire early next year from public service aged 54. So in my case the difference in annual pension between taking the actuarial reduced early retirement next year or retiring next year and awaiting a deferred pension at age 60 is approx 5k per year.
I am curious about the actuarial calculation used for the actuarial reduced option and if it makes financial sense to avail of this. Has anyone looked into how this is calculated if this option is a good financial option?

 

[Early Riser]

I don't know about actuarial calculations but the reduction factors date from almost 20 years ago. As average life expectancy has increased in the meantime I doubt they would be as favourable if they were being calculated afresh now. Obviously this refers to the overall average - you have no guarantee as to how it will play out in any one individual situation. I would be more inclined to be guided by how this works for you now and into the future - financially, but also generally.

 

[LDFerguson]

I'm not an actuary and I know nothing about the method by which these figures are calculated. What I can suggest is to compare the two and make an assumption that you live to be mid-80s. Choose your tool of choice - a spreadsheet is handy but a pen, paper and calculator will do. Two columns - the early retirement version starts from 2023 - amount to be paid in 2023, your age (54), next line add a percentage for increases in your pension, lather, rinse and repeat until you get to mid-80s. The second column is the same but starts from the year you hit 60 and uses the higher annual pension figure. Add up the totals at the bottom.

 

[Tuscany]

I can’t assist on the actuarial aspect. Which of the actuarial reduced or the preserved benefits is more advantageous will probably come down to life expectancy and indexation. You have an interesting comparison to make.

I expect that you also qualify for a lump sum. So, you need to factor in an actuarially reduced lump sum at age 55 rather than the full amount at age 60. If opting for the preserved option, you are deferring the receipt and use of the lump sum to age 60 and any benefit that you could have had between 55 and 60 from it.

In opting for preserved option, the big gap to recover is 5 years of pension that you could have received between 55 and 60 on the reduced option.

When factoring in future increases, it’s probably worth noting that to date retirees have received increases in line with their previous grade but that is not guaranteed in future.

 

[bstop]

Are you pre 95 ?
If you are and you retire at age 54 you would have plenty of time to get reckonable Prsi contributions until age 66. This could allow you to make up for the financial hit by gaining a significant portion of the contributory pension.

 

[johnfenit]

The actuarial reduction is based on a 'cost neutral' principle, ie you're getting your pension earlier for a longer period, so it has to be discounted to reflect this benefit. The cost per year is roughly 4.5% for each year aplied to the pension and a slighly smaller amount applied to the lump sum.

I retired at 58, did the simple maths of applying 10% annual pension reduction (2 years by 4.5%) , similar with tax free lump sum. I then drew on my accumulated PRSA AVC to fully utilise my tax free lump sum and set up an ARF to draw extra income.

Retiring 6 years early, ahead of normal retirement age (NRA) costly.

Go to your Pensions section, ask them for a pensions forecast for retirement at age 54, also 58 and 60. Get prefessional advisor to advise.

 

[Groucho]

Are you pre 95 ?
If you are and you retire at age 54 you would have plenty of time to get reckonable Prsi contributions until age 66. This could allow you to make up for the financial hit by gaining a significant portion of the contributory pension.

Bear in mind that the revised State contributory pension system (which is due to commence next year) will mean that someone who only starts making reckonable PRSI contributions at age 54 would only be eligible to receive about 27%* of the full pension by retirement age. In 2023 terms that would be about €72 a week gross.

* [11X52]/2080

 

[NoRegretsCoyote]

Has anyone looked into how this is calculated if this option is a good financial option?

This is entirely up to you. The actuarial reduction factor is the actuarial reduction factor and it's there to take or leave. Whether you think it's a good sacrifice depends on a lot of things. How much do you want to spend in retirement, what are your obligations, will you have dependents, is your mortgage paid off, etc.

I doubt they would be as favourable if they were being calculated afresh now.

This is a very important point and in future they will only be made less advantageous than if you retire today. Irish life expectancy has increased (in particular for men) well ahead of expectations in the last decade. Life expectancy for Irish men is now the highest in Europe.

 

[Early Riser]

I don't know about actuarial calculations but the reduction factors date from almost 20 years ago. As average life expectancy has increased in the meantime I doubt they would be as favourable if they were being calculated afresh now.

the difference in annual pension between taking the actuarial reduced early retirement next year or retiring next year and awaiting a deferred pension at age 60 is approx 5k per year.

As the actuarial reduction factor would be in the 25% region if CNER is taken between 54 and 55 then I am guessing the Preserved Pension is about 20K and the CNER Pension about €15K.

If death occurs at 80 then the total paid under CNER would be €375K as against €400K under the Preserved option. A difference of €25K. (Leaving out any increases based on links to salary scale).

If death is at 90 then CNER pays €525K and Preserved pays €600K. A difference of €75K.

If death is at 100 then CNER pays €675K and Preserved pays €800K. A difference of €125K.

This ignores any consideration of Survivor Pension. Any increases linked to salary scale would be at the same percentage in each case and so would only serve to increase the actual divergence in favour of the Preserved Pension option.

Does increased life expectancy favour the Preserved option in terms of monetary value? If so, there is no case for increasing the CNER actuarial reduction factor to reflect increasing life expectancy? Maybe the opposite?

 

[bstop]

Bear in mind that the revised State contributory pension system (which is due to commence next year) will mean that someone who only starts making reckonable PRSI contributions at age 54 would only be eligible to receive about 27%* of the full pension by retirement age. In 2023 terms that would be about €72 a week gross.

* [11X52]/2080

Presumably they would have a few years of pre establishment contributions. Add in pre entry and change of status credits and they could possibly achieve 14 or 15 years of Prsi contributions. They might qualify for roughly 90 euro a week.

 

[stoves1]

Having retired at 60 from public service about 7 months ago, my advice would be if the CNER pension you can get once you retire at 54 is enough for you to have satisfaction plus once you have 20yrs full tie service then you can maximise your lump sum to 1.5 times pensionable salary via AVC, then i would take definitely take the pension and lump sum now, you have paid into it during your service, and who knows where or what life may throw at you if you wait another 5yrs with no income having given service to the state. If you wish to get another job or travel etc go for it ,but definitely do Not leave your job if the intention is to build up future PRSI contributions with the hope of getting an extra pension from the state at 66. There my words to the wise!

 

[NoRegretsCoyote]

Does increased life expectancy favour the Preserved option in terms of monetary value? If so, there is no case for increasing the CNER actuarial reduction factor to reflect increasing life expectancy? Maybe the opposite?

You're dead right. Increased life expectancy should lead to lower actuarial reductions, not greater. This is probably why the factors haven't been adjusted in 20 years.

 

[bstop]

definitely do Not leave your job if the intention is to build up future PRSI contributions with the hope of getting an extra pension from the state at 66. There my words to the wise!

Building up extra Prsi needn't necessarily be the goal, but it is definitely worth keeping in mind. Various ways can be used to get extra paid contributions to reach the 520 full rate paid level. These do not necessarily involve full time employment. Presumably the poster would already have a few years of A class paid. If they manage to reach 260 paid A, they would then be able to make voluntary contributions, as they will have the required 520 paid contributions, (in order to be eligible to make voluntary contributions) when they include their B or D paid contributions.
To get to 260 full rate paid contributions they could make ARF drawdowns to get S class or get part time employment to gain paid A class. They only need to earn 38 euro per week to get an A class contribution.
Once they have reached the 520 full rate paid contribution level they can then sign on for credits in order to maximize their pension entitlement.