# AVC Vs Purchase Notional Service



## wexfordcoco

I work in the Local Council, I have been there for 3.8 years and I have just been made permanent.

I have been given the option of purchasing Notional Service, or I can of course get a AVC to make up my shortfall. I am 44 years old, so I am short by 16 years!

To buy Notional Service will cost me €77 weekly (I assume that is net) for that I will receive my full benefit when I retire at 65, which is 1.5 times my salary in a lump sum (79k) plus €316 a week, plus my state pension which I think is currently €193, giving me a total of €509 per week till I die.

I called the Personal and Corporate people (VNC's) and they told me for the €77 a week contribution I would get a lump some of €64k and a total of €552 including my state pension a week (not sure why the lump some is different, unless he worked it our wrong?)

Anyway, my question is, what way to go, Notional or AVC?
I have heard that the Notional contribution is soon to go way up (imminent) so I really need to make a decision quickly.
I have also been told (by Personal and Corporate) that the VNC option is much more flexible and a much better deal?

Your advice please


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## ajapale

Hi WCoCo,

Who are the "Personal and Corporate people (VNC's)"? 

Are they private pension providers? Or perhaps they run the an approved AVC scheme for the Local Government Superannuation Scheme?

Have a look at some the key posts at the top of this forum.

In general (and there are some exceptions) notional purchace of service in a gererous public service superannuatio scheme is better than the AVC's.

Some things to consider:
What pension arrangements if any did you have before joining the Local Authority?
Do you intend staying in the Public Service until you retire? What is your potential career trajectory? (With DB schemes you retire on a proportion of your final salary).
When you retire are your pension payments indexed at parity with the scale, indexed at a fixed rate, indexed at CPI or not indexed at all?

aj


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## wexfordcoco

They are a supplier of AVC's for Local Authorities!

I know it is a personal decision, but it would seem "in general" people think the Notional Purchase deal is a better option, would you agree with that statement?
Just to clarify, to make my personal decision, the things I need to consider are;
AVC's and dependent on the market and are not guaranteed, so I may, or may not do better at retirement? However with the Local Authority option I am "guaranteed" my 1.5 times salary plus 50% of weekly wage!
One down side to purchasing Notional service I have heard is it is not as flexible as an AVC - for example to get the full pension I need to put in €77 a week now, and I can not change that if my circumstances change and I wish to donate less in a few years - Is that true?
Is there anything else you think I should be thinking about in comparison that would help with my decision?
Also, have you heard that the Notional Purchase Scheme is about to go up? HR here told me it was imminent, and it would be going up a lot so I should get in ASAP?


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## Guest126

Hard to beat notional purchase - so long as you plan to stay in that same employment long term...


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## Binomial

WexCoCo,

What are the charges associated with the company avc scheme?

BiN


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## Martinslan

Mrs Slán (national teacher) was paying AVC's ; Cornmarket got in very fast. She only found out about buying back Notional Service much later.
When we looked at the numbers we decided to stop paying AVC's and switch to Notional Service. Personal decision by her and no regrets.
hope this is of help

Slán


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## ajapale

Do you have a spouse or children? When you are buying notional service are you buying into the spouses and childrens scheme as well?

What were your pension arrangements before you joined the local authority? If you were a member of an occupational pension scheme there may be revenue limit and tax implications. (this would require independant professional advice)

In some cases local authority employees may be on a low pensionable salary but on significant non pensionable earnings (overtime etc): in this scenario it migh be worth while to consider the notional purchase and either the company approved AVC (or a stand alone PRSA that you would arrange yourself).

This [broken link removed] which was produced by IMPACT trade union concerning its arrangements with Marsh makes interesting reading.
[broken link removed]



> *Are AVC’s similar to the purchase of Notional Service?*
> Both AVC’s and NSP aim to provide extra benefits at retirement or on death before or after retirement. However, the AVC Scheme does not offer a similar guarantee to the NSP
> Scheme. Each contribution to the AVC Scheme is invested, and its eventual value will depend on the length of time it is invested and the investment growth in that period. The
> accumulated fund may then be used to increase benefits within Revenue Limits. It is possible to be selective with regard to the benefits purchased with AVC’s. You may
> choose the additional benefits you require from the range of benefits. For instance, subject to Revenue limits, you might elect to fund for tax-free lump only. It is also possible to
> incorporate death benefits to a far greater extent than under the NSP Scheme. The NSP Scheme will only allow you to purchase benefits up to the maximum provided
> under the Superannuation Plan, whereas the AVC scheme will allow you to purchase benefits up to Revenue maximum benefits. Therefore, there are a number of circumstances
> where notional service is not permitted but AVC’s can be made, namely:
> (a) Where you wish to provide additional life cover or spouses’ and dependants pension
> (b) Where your pension is reduced by virtue of your entitlement to a Social Welfare
> pension. This provision applies to all employees who joined service after 6th April 1995.
> (c) Lump sum payments to the NSP Scheme must be made within two years of becoming pensionable or within two years of retirement. No such restriction applies to the AVC Scheme.





> *2.15 Local Authorities*
> 
> 2.15.1 The Minister for the Environment, with the consent the Minister for Finance, has responsibility for the Local Government Superannuation Scheme (LGSS), which is governed by the Local Government (Superannuation) Act, 1980. The two main schemes made under this Act are the Local Government (Superannuation Revision)(Consolidation) Scheme, 1986 which sets out the provisions previously contained in the non-statutory Superannuation Revision Scheme, 1977, and the Local Government (Superannuation) Act, 1956 (Consolidation) Scheme, 1987 which incorporates the provisions of the now repealed 1956 Superannuation Act. A number of other schemes have been made covering areas such as spouses' and children's pensions, transfer of service, and the purchase of notional service. A number of circular letters also apply.
> 2.15.2 The LGSS applies to officers and employees of local authorities, health boards, vocational educational committees, institutes of technology and regional technical colleges, and certain local government and health corporate bodies.
> 2.15.3 Under the LGSS, officers and employees have the same pension terms as established and non-established civil servants, respectively, with the exceptions outlined below.
> 2.15.4 Psychiatric nurses (as noted at 2.14.3 above) and fire brigade personnel, may retire after age 55, with their service in excess of 20 years' counting as double.
> 2.15.5 In the case of officers designated as_ professional_ under the Local Authority (Officers and Employees) Act, 1926, an addition of up to one-third is made to reckonable service where retirement takes place after 60 years of age.
> 2.15.6 As a pension contribution of 5% already applied under the main pension scheme, no uprating of salary took place when full PRSI was introduced in respect of all officers appointed on or after 6 April 1995.
> 2.15.7 Special early retirement terms apply to City and County Managers who are appointed on a non-renewable seven-year contract basis (similar to civil service TLAC Secretary terms - see 2.4.7 above)


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## wexfordcoco

Binomial said:


> WexCoCo,
> 
> What are the charges associated with the company avc scheme?
> 
> BiN


I haven't been quoted any, that is a good point I guess I should ask! Are there charges with the Notional Purchase Scheme?


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## oysterman

wexfordcoco said:


> I haven't been quoted any, that is a good point I guess I should ask! Are there charges with the Notional Purchase Scheme?


There won't be (there never are). There will be charges with AVCs and they are unlikely to be small. One option you could consider (if for some reason - mainly because you anticipate leaving that employment soon - you would prefer AVC to Notional Service) is a PRSA through a fee based broker.

But, quite honestly, in a low interest rate/uncertain investment return environment it's hard to beat Notional Service.


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## Slim

Hi Wexfordcoco
Either you are confused or I am! What you will be paying at €77 p.w. is not Notional Service but superannuation(+ Spouses&Children contribution), on the past 3.8 years temporary service. This should give you 25 years service at age 65. I take it from your post that you have other contributions that will make up the 40 years OR are you factoring that into your €77 per week? If you have NO prior service in a pension scheme, then you may have to both pay back the superannuation over a maximum of 36 months AND take out an AVC/PRSA to make up the difference. If you have a pension fund or have paid PRSI at the full rate in a prior occupation that may complicate the matter, as Revenue will only allow you to receive a maximum pension at retirement equivalent to 66% of final salary including lump sum.

Slim


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## wexfordcoco

Slim, I met with my HR department in Wexford county council and they gave me a "Benefit Statement". It outlined the benefits I would receive if I stay paying the standard contribution. They also gave me another statement that calculated the "extra" amount I would need to contribute, this document was entitled "Purchase of Notional Service" and it stated that I would need to contribute an extra €77 a week to retire on full benefit when I am 65 (1.5 times salary lump some and 50% of my weekly wage at retirement.
My question was, "personal and corporate" a AVC supplier quoted me also. They send €73 a week would get me the same deal. My question is, in the forums estimation, in my case - 45 years old, 3.8 years service, retiring at 65. Is it better to go with an AVC or purchase Notional 
service?


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## ajapale

I think the answer to your question is: *Buy Additional Service*.

If you work to age 65 you will have 20 years service.

It is not clear whether you have been a member of the scheme for the last 3.8 years. If you have not then local authority should give you the opportunity to buy back those years. This is common where an employee was (say) an apprentice fitter and wanted to have those four training years counted as service. This is not notional service as you have actually worked these years in the organiation.

When you have done this you will have 23.8 (20+3.8) years service at age 65. In order to retire at age 65 on full pension you will need to buy back 16.2 years of notional service to bring you up to 40 years service. ( ie years you did not work for the Local Authority.) This is called notional service.

In some public sector organisations the figure to buy notional service is calculated by the scheme actuaries and you are given a choice to pay a lumpsum or to pay an amount over a number of years. Some organisations agree a fixed sum while others agree an additional % of pensionable salary. The amount is usually also split to reflect the amount which relates to the spouses portion of the scheme.


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## Slim

Wexfordcoco, apologies if I misunderstood the query. You have clearly got the terminology and concepts sorted. I would agree with the last poster who said buy the Notional Service. It guarantees you a set pension and lump sum and that is becoming a rare and beautiful thing these days. If PRSA-AVCs were better for the employee, you would not have companies opting out of Defined Benefits Schemes at the rate they are doing so.[however, you could also open a PRSA to enable you to retire at 60 and avail of tax relief]

Slim


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## wexfordcoco

Thank you to all posts, the information has helped me make an informed decision. I will be purchasing Notional Service.

Thanks again for a great response.


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## mula

P AND C / new  ireland Charges for siptu are

75.46% allocation year 1 allocation on 250 pm or more 
96.96% therafter

management charge is a whopping 2.75% for the first 10 years and .75% thereafter 

quotes are based on 8 and 6% growth rates 

did the rep go through these with you?

i'd go with the avc althought not with p and c. nsp's are grand if you believe you will live to be 90. from what i see most people are hardest on  money when in the early yrs of retirement and with the avc/arf you can draw out money as required unlike the nsp which is doled out at the same rate every fortnight. an other point to remember is if  you die half of the extra pension  you bought will die with you whereas the avc will be paid out tax free to your missus.


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## wexfordcoco

Well, now I am confused again! ajapale, Slim, and anyone else who said I should go with the NP - What do you have to say to this last reply that says go with an AVC?ajapale


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## Coordinated

Mula, Do you have a vested interest that we should know about?


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## Guest126

The extra years will serve to increase the tax-free cash at retirement, I would definitely recommend the added years so long as you plan to stay there to retirement, i.e. you are a 'job for lifer'


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## wexfordcoco

Just to make it clear - I do intend to stay for life, 65 anyway. Also if it helps, I am married with one child and one on the way!


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## ajapale

Hi WexCoCo,

Buying "added years" in the local government superannuation scheme is a "no brainer" more especially if you intend staying with in the public service to age 65 and because you have spouse and children.

In these schemes the employer (in this case the government) takes ALL the risk and the employee takes no risk.

Did you find out whether your eventual pension is indexed A)parity with salary scale, B)fixed %, C)CPI%, D)discretionary increases, E)no post retirement increases. If its A then it is a brilliant scheme!


aj


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## mula

its A


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## mula

Coordinated said:


> Mula, Do you have a vested interest that we should know about?


 
i'll send you the bill



wexfordcoco said:


> Just to make it clear - I do intend to stay for life, 65 anyway. Also if it helps, I am married with one child and one on the way!


 

regardless of which option you go for you should consider using the avc to fund for your childs education given that you will be retiring about by the time college comes around far better then putting the allowance into the post office etc imho 

congrats by the way


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## wexfordcoco

It is A yes!

Okay, thanks, I am not going to draw this out any longer - thanks for your help, I am going with the NP!!


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## Coordinated

mula said:


> i'll send you the bill


 Ill take that as a "maybe" you have a vested interest.


mula said:


> regardless of which option you go for you should consider using the avc to fund for your childs education given that you will be retiring about by the time college comes around far better then putting the allowance into the post office etc imho



WexCoCo,
You have to be carefull not to exceed revenue limits if you take mula's advice.

If saving for your children's education is an issue I would suggest that you consider all  the options and seek independent, professional, financial advice. Using a product designed for one purpose (funding your retirement) for another (funding children's education) may not be a good idea.

Finally, beware of salespeople trying to sell you one form of "income protection" or "Permanent Heath Insurance" or other. Do a search in the insurance section here if you are considering one of these products.

I think you have done the right thing in buying the added years. Good Luck! 

Coordinated.


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## mula

> Coordinated said:
> 
> 
> 
> Ill take that as a "maybe" you have a vested interest.
> 
> 
> 
> 
> take it any way you like
> 
> 
> 
> 
> 
> Using a product designed for one purpose (funding your retirement) for another (funding children's education) may not be a good idea.
> 
> Click to expand...
> 
> 
> why? if your children are going to college when you retire then why not especially if your gonna go from the high rate to the low rate of tax in retirement not to mention avoiding DIRT/cgt etc. theres no legislation that says you cant fund this way
Click to expand...


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## RainyDay

Mula - You need to check out . This is not an 'optional feature' - this is mandatory.

I agree with Mula on one point - there is nothing wrong with using an AVC product to fund college fees, if everything else falls into place. However, Mula has failed to explain why he/she believes AVCs would be better than Notional Purchase in this case.


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## wexfordcoco

well just to throw a spanner in the works, I just received this from my Personnel office this morning. Remeber on my first post I said I heard the rates were going up!

The revised rates will apply in any case where contributions commence on or after *11th **December, 2006*. It is only purchase agreements already entered into for which contributions have already commenced or commence before that date that will not be affected by the revised rates in the circular.

Unfortunately, because your contributions would not commence until March, 2007, the revised contribution rates will have to be applied to you.

This takes my weekly amount from €77 to €103!!
So what say you now?


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## ajapale

Hi WexCoCo,

Im sorry to hear that you appear to have missed the boat in relation to the revised notional purchase rates.

How many years service are you getting for the €103? (Is it 16.2?) Over how many years will you be paying this? Is this a fixed amount or is it a % of your gross wage?

aj


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## wexfordcoco

Yes 16.2 will give me the 40 years! It is a % of my gross wage. Maybe I will have to look again at AVC's. The calculation I got from them was about on par (given market performance of course) with the original €77, so I guess it is going to look a whole lot attractive now!! Does anyone now which AVC provider provides the best rates as far as commission charges are concerned, I assume I can use anyone, and not just the one recommended by my HR department “Personal and Corporate”?


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## mula

RainyDay said:


> Mula - You need to check out . This is not an 'optional feature' - this is mandatory.


read and understood no i have no vested interest


> I agree with Mula on one point - there is nothing wrong with using an AVC product to fund college fees, if everything else falls into place. However, Mula has failed to explain why he/she believes AVCs would be better than Notional Purchase in this case.


 nsp is paid out at a fixed amount whereas you control how much you draw out from your avc/arf in order to meet college expenses  etc

you also leave the option open for early retirement without being hit with a actuarial reduction on your purchased years

 should anything happen to you the childrens part of the widow and orphans scheme pays out till there 22 if they go to 3rd level. This leaves only half of your pension available to put your kids through college.  Whereas the avc pays out tax free to your spouse should you pop your clogs leaving a nice lumpsum to fund there education  

overall i guess its about keeping your options about your retirement open as who knows how you will feel about work in another 10 years


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## mula

wexfordcoco said:


> Yes 16.2 will give me the 40 years! It is a % of my gross wage. Maybe I will have to look again at AVC's. The calculation I got from them was about on par (given market performance of course) with the original €77, so I guess it is going to look a whole lot attractive now!! Does anyone now which AVC provider provides the best rates as far as commission charges are concerned, I assume I can use anyone, and not just the one recommended by my HR department “Personal and Corporate”?


 
make sure you look at the funds available, funds performance, cost of switching etc aswell as commissions.


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## RainyDay

wexfordcoco said:


> well just to throw a spanner in the works, I just received this from my Personnel office this morning. Remeber on my first post I said I heard the rates were going up!
> 
> The revised rates will apply in any case where contributions commence on or after *11th **December, 2006*. It is only purchase agreements already entered into for which contributions have already commenced or commence before that date that will not be affected by the revised rates in the circular.
> 
> Unfortunately, because your contributions would not commence until March, 2007, the revised contribution rates will have to be applied to you.
> ]


Just for the record, the planned increase in rates was flagged up on AAM some months back.


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## Guest126

Hi Wex even with the new rates I would still strongly encourage you to buy years so long as youre planning to stay in that job.J ust look at Bank of Ireland where they are willing to strike for their defined benefit rather than defined contribution - you're lucky enough to have the choice, given choice most people would go DB.


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## ajapale

This excellent post was made by oysterman in the thread mentioned by rainyday above.



oysterman said:


> ...Sat down and cranked out a number of scenarios Whatever way I cut the figures, if I live to any sort of average age at all it's a good deal (even without the huge benefit of the salary-linked spouse's pension).
> 
> It is very difficult to judge the public sector notional service scheme against an AVC scheme because there are so many areas of difference. Here are just a few to consider:
> 
> 1) If you're on an incremental scale, the earlier you start buying notional service by regular contribution the cheaper it is because you pay a fixed %age of salary and will get the benefit of the extra increments and any additional allowances to which you become entitled. This is a significant benefit of notional service over AVC - any significant salary increases late in your career will tend to make an AVC scheme look severely underfunded.
> 
> 2) Future public service inflation-adjusted pay increases are impossible to predict but if you extrapolate the last 10 years' figures the picture looks bleak for an AVC scheme trying to keep up with notional service.
> 
> 3) A state guarantee of benefit versus the volatility of equity and money markets aids restful sleep.
> 
> 4) No commission, bid-offer spreads or hungry salesmen bothering you with the state scheme.
> 
> 5) AVCs probably win on flexibility i.e. if you take a career break your notional service contract is interrupted and you'd have to take a new one out on resumption of employment at whatever contribution rate and terms and conditions would then apply - this was not something I looked at or factored into the considerations since I never expect to be in a position to take a career break.
> 
> 6) AVCs do give you a big lump of capital to pass on to the chosen ones if you don't go down the annuity route and your ARF performs well enough in your retirement to avoid significant capital drawdown.


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## wexfordcoco

So basically what everyone is saying, even with the extra €30 a week increase I should still go with the NP? Boy do I wish I was born in December - I had agread with HR to sighn up, but they couldn't put me in until my next birthday, March 07!


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## Ret45

Definitely buy as much notional service as you can - you are in a very fortunate position to do so. I would not hestiate to buy notional service, whichever way you cut it it makes financial sense. Anyone can do an AVC or PRSA but the perk of state jobs is the pension benefits.


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