Should I worry about public sector pension?

[Josey Wales]

Hi,

I've recently been thinking about my financial situation. I have recently inherited a lump sum and need to get good financial advice. One thing that I have been thinking about is my pension.

I'm 31 and have been working in the civil service since 1999. As it stands I expect to complete my 40 years without a break in service. I am trying to decide if the public sector pension will be good enough when I retire. And if I should invest in AVCs or a PRSA.

If you complete the full 40 years is there any point in investing in AVCs? Am I getting ahead of myself thinking about my pension with 28 years still to go. I plan on talking to a financial advisor but wasn't sure if they would be au fait with the workings of public sector pensions.

I hope I've managed to articulate a question in there somewhere.

 

[LDFerguson]

With a potential 40 years' service, you'd have a certain amount of scope to make AVCs to bridge the gap between the Public Sector pension and the maximum pension that Revenue will permit. A bigger question would whether or not doing so would be a good idea. For one, if your anticipated PS pension + the State pension would be likely to put you into the high rate of tax in retirement, then I wouldn't be inclined to make substantial (if any) AVCs. If you're only going to get tax relief at 41% on the contributions but would be taxed at 41% on the proceeds on the way out, there's little incentive.

As you suggest, the investment of a once-off inheritance should be done slowly and with consideration. While the pension aspect should be explored (if only to eliminate it), you should also consider other matters e.g.: -

• Have you any short-term or credit card debt?
• Do you own a home or plan to buy one?
• Do you have kids or would they be in your life-plan? (Expensive things, ankle-biters.)
• What degree of risk would you be comfortable with taking, in order to obtain a return?

You should have a think about short, medium and long-term plans and only then start thinking about how the money could fit into those plans.

P.S. Beware of any advisor or salesperson that tries to sell you an investment on the basis that it's likely to provide a great return in the short term. If that was possible to predict, the advisor wouldn't need to work. What you should instead be aiming towards is a portfolio of good investments that match your own appetite for risk.

Liam D. Ferguson

 

[Jim2007]

If you complete the full 40 years is there any point in investing in AVCs? Am I getting ahead of myself thinking about my pension with 28 years still to go. I plan on talking to a financial advisor but wasn't sure if they would be au fait with the workings of public sector pensions.

Nobody can tell you what will happen in the next 28 years either to the public sector, taxation on pensions or your own circumstances and I'd be very wary of advisors who produce a single course of action proporting to be able to do so.

Another thing to remember is that you are the best person to manage your money, by all means take advice but at the same time, take the time to educate yourself on who to manage your money. Also, don't feel under any pressure to act now - this idea that if you don't do something right now or you'll miss out is for fools!

My own favourite is to challenge convention, I'm not saying break with convention but be sure it is the right thing for you. A lot of people invested in property because everyone was doing it and look how will that turned out!

On a more practical note two things I would do:

• Pay down debt
• Build an emergency fund to cover 3 to 6 months of living expenses

The thing is that no matter what kind of investment decisions you make, it will take time to come good and you should not be in a situation where you have to dispose of an investment in a hurry.

As regards, the long term I would work on a couple of different out comes before making any decision - e.g. What if you can't complete the 40 years because of sickness, what if PS pension funds are switched to defined contributions - a common event in other parts of Europe and so on.

 

[kceire]

For one, if your anticipated PS pension + the State pension would be likely to put you into the high rate of tax in retirement

Liam D. Ferguson

minor note, but the OP joined the PS after 1995, so his PS pension includes the State Pension, he will not receive 2 separate pensions.

 

[LDFerguson]

minor note, but the OP joined the PS after 1995, so his PS pension includes the State Pension, he will not receive 2 separate pensions.

Sorry - good spot.

 

[Complainer]

With a potential 40 years' service, you'd have a certain amount of scope to make AVCs to bridge the gap between the Public Sector pension and the maximum pension that Revenue will permit. A bigger question would whether or not doing so would be a good idea. For one, if your anticipated PS pension + the State pension would be likely to put you into the high rate of tax in retirement, then I wouldn't be inclined to make substantial (if any) AVCs. If you're only going to get tax relief at 41% on the contributions but would be taxed at 41% on the proceeds on the way out, there's little incentive.

While I agree with the jist of your post, and in particular the recommendation to look at the overall financial picture, I wonder if you are underplaying the tax benefit.

Isn't there a substantial benefit available from being able to contribute gross amounts to an AVC and get the growth arising from those gross amounts, even if you have to pay tax on drawdown?

The OP also needs to consider the risks around public sector pensions - whether the Govt will default or not before his pension is due, and how this might affect him. I understand that Greece have just applied a 15% cut to all public sector pensions across the board, and that is before a default situation applies.

 

[LDFerguson]

Isn't there a substantial benefit available from being able to contribute gross amounts to an AVC and get the growth arising from those gross amounts, even if you have to pay tax on drawdown?

Yes that's a very good point for someone who has a long time to go until to retirement like the OP. That said it's a hard one to convince a client on at the moment given the recent cycle that many pension funds have come through where the growth averages have been dragged down in recent years. I'm happy that it's just that - a point in a cycle - and that over the long-term real assets will produce appropriate returns. But there will always be many more who feel that it's proof that the investment and pensions world has stopped turning and that we'll never see growth again.

 

[Pexus1976]

Hi,

I've recently been thinking about my financial situation. I have recently inherited a lump sum and need to get good financial advice. One thing that I have been thinking about is my pension.

I'm 31 and have been working in the civil service since 1999. As it stands I expect to complete my 40 years without a break in service. I am trying to decide if the public sector pension will be good enough when I retire. And if I should invest in AVCs or a PRSA.

If you complete the full 40 years is there any point in investing in AVCs? Am I getting ahead of myself thinking about my pension with 28 years still to go. I plan on talking to a financial advisor but wasn't sure if they would be au fait with the workings of public sector pensions.

I hope I've managed to articulate a question in there somewhere.

I think your right to be concerned you mentioned that you would have full service at retirement. Approx 42 yrs at age 60yrs. The state pension has been pushed out to age 68. So there will an 8 yr gap. You will need to sit down and work out the pension you'll have at retirement and if it will fit in with your retirement plans. I heard an interesting statistic recently; it takes the average retiree approx 3 years to spend their tax free lump sum.