# Risk of overfunding/Is definition of Final renumeration at the revenue's discretion?



## GeneralZod (18 Oct 2007)

How flexible is the definition of Final Renumeration in this case?

I change jobs several times during my career making DC pension contributions including AVCs into different occupational schemes in each job. 

Ten years before full retirement I change to a lower paying job (1/2 - 2/3rds of previous salary) to have more free time.


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## boaber (19 Oct 2007)

*Re: Risk of overfunding/Is definition of Final renumeration at the revenue's discreti*

From the Pensions Revenue Manual:

Final Remuneration may be computed on one of the following bases:

(i)	(a)	Basic remuneration over any twelve month period of the five years preceding the relevant date (i.e. the date of retirement, leaving service or death, as the case may be),

	PLUS

	(b)	the average of any fluctuating emoluments over three or more consecutive years ending on the last day used in (a) above.

(ii)	The average of the total emoluments for any three or more consecutive years ending not earlier than 10 years before the relevant date.

(iii)	The rate of basic pay at the relevant date or at any date within the year ending on that date plus the average of any fluctuating emoluments calculated as in (i) above.

Provided that-  

(i)	Basis (iii) cannot be used where within three years before the relevant date an employee:

(a) 	Was promoted or received a special increase in basic pay, and

	(b)	The total increase over the relevant three year period is greater than it would have been if the remuneration on the day of commencement of the period had been increased proportionately to the increase in the Consumer Price Index, or to increase applicable to the employment under a National Wage Agreement, during the same three year period.

		However, it is possible to agree beforehand with Revenue that such increases, if given on a recognised scale applicable to defined groups of arm’s-length employees, will not prevent the availability of basis (iii).

(ii)	Whenever final remuneration is calculated by reference to a year or years other than the 12 months ending with the relevant date, each such year's remuneration may be increased in proportion to the increase in the cost of living from the last day of that year up to the relevant date referred to as "dynamised" final remuneration.  This also applies to fluctuating emoluments so that fluctuating emoluments of a year other than the twelve months ending with the relevant date may be increased as detailed above.

(iii)	In the case of a 20% director -

	(a)		the scheme may not adopt either of the bases (i) or (iii), and

	(b)		Proviso (ii) above may not be applied unless it can be shown to the satisfaction of Revenue that the amount of the non-commutable pension payable or remaining payable or payable before the application of rules permitting commutation of the whole of the benefits to the director is not less than two-thirds of the annuity equivalent of all retirement benefits payable to the director (or to which he is entitled) under all schemes of the employer at the time any lump sum benefits are to be paid to him under the rules.

(iv)	Where sick pay is drawn for 10 or more years (under, say, a sick pay or permanent health insurance scheme) and the member is regarded as continuing in service, "final remuneration" may be calculated by reference to the employee's pay for a selected period as detailed above before the date on which he dropped from full pay to sick pay.  This figure may be increased proportionately to increases in the Consumer Price Index between the relevant dates.


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## GeneralZod (19 Oct 2007)

*Re: Risk of overfunding/Is definition of Final renumeration at the revenue's discreti*

Boaber,

Thanks for that reply. If I understand it right I'd have to wait until 7 years before normal retirement to ramp down. Otherwise the final renumeration would be calculated on the basis of the lower salary figure. Leaving the possibility of an over-funded pension pot.

Given that limits exist on what I can put tax free into the pension I'd find it more of an incentive to make AVCs if what could be taken out at the end wasn't also restricted by future career decisions I might make/have made for me. With DC pensions IMO the payout should only depend on the value of the accumulated fund and the age at which benefits are first taken.


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## z109 (19 Oct 2007)

Does the 2/3 final salary pension limit exclude: tax-free lump sum, spouses pension etc. (So they can be taken out of the pension pot first before the salary limit is calculated)>

cormacol seems to say that it does here. 

I agree that DC pensions should not be limited in this way - it's the first I've heard of it, and quite frankly it's a bit scary, as I had planned a slow decline in my later years!


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## MMilken (19 Oct 2007)

yoganmahew said:


> Does the 2/3 final salary pension limit exclude: tax-free lump sum, spouses pension etc. (So they can be taken out of the pension pot first before the salary limit is calculated)?


 
*NO.*


The limit on total fund size is an amount such that it would buy a pension (with escalation and 100% spouse pension) of 2/3 of final remuneration at normal retirement.


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## GeneralZod (19 Oct 2007)

*Re: Risk of overfunding/Is definition of Final renumeration at the revenue's discreti*



yoganmahew said:


> I agree that DC pensions should not be limited in this way - it's the first I've heard of it, and quite frankly it's a bit scary, as I had planned a slow decline in my later years!



After trying to get my facts right I'm going to make an individual submission on the pensions green paper about this. www.pensionsgreenpaper.ie


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## Homer (23 Oct 2007)

*Re: Risk of overfunding/Is definition of Final renumeration at the revenue's discreti*



GeneralZod said:


> If I understand it right I'd have to wait until 7 years before normal retirement to ramp down. Otherwise the final renumeration would be calculated on the basis of the lower salary figure. Leaving the possibility of an over-funded pension pot.


 
Actually, it's a period of three or more years *ending *not more than 10 years from retirement, so you could start to ramp down ten years in advance of your planned retirement date. And you will be able to increase ("dynamise") your earnings in line with inflation when calculating final remuneration.

Regards
Homer


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## aidan119 (25 Oct 2007)

My understanding is that the max funding calculation it is split by employment so that you don't lose out by taking a lower paid job at the end of your career. Effectively there is a max calculated for each employment and they are summed up.
I understand the above revenue formula is applied _seperately_ to _each_ employment.
There was a previous thread here on this where it was discussed. I also checked with our pension broker some time ago and she confirmed that you do not lose out..


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