# What is counted as Final Salary when my pension entitlements are being computed?



## BOXtheFOX (9 Dec 2016)

What is counted as my Final Salary when calculating a DB pension. Is other remuneration taken in to account, such as VHI benefits, company cars, guaranteed annual bonus etc or is it just my basic salary?

Does it matter?


----------



## jpd (9 Dec 2016)

Of course it matters!

You will have to look at the rules governing your DB scheme or ask the Pension fund trustees - details may vary from one scheme to another


----------



## Steven Barrett (9 Dec 2016)

You have to look at the scheme rules. For most (all?!) DB schemes, it is basic salary less OAP. I have never come across a DB scheme that takes bonuses or other benefits into account, it just works out too expensive.  

Now, the Revenue rules are different and you can take all of them into account, especially if you have AVC's and you want to use them to maximise the lump sum payable to you. 


Steven 
www.bluewaterfp.ie


----------



## BOXtheFOX (9 Dec 2016)

Hi Steven. How would the above work in practice. Let's say that my DB scheme is basic salary less OAP. Mercer have calculated my pension and tax free lump sum based on my final salary that was provided to them by my employer.

I also have a lump sum in a DC contribution with the same employer by the way.

How do I then get Mercer to increase the lump sum tax free allowance based on revenue rules?  Do I simply contact them and tell them that in addition to my basic salary I also had other benefits.

They have told me that the tax free lump sum was a mathematical calculation as follows "You are permitted to take a cash lump sum of 1.5 times your final remuneration ratioed by your completed service  / potential service".

Is there a list of items available online that the Revenue allow to be included as remuneration when calculating my final salary?


----------



## Conan (9 Dec 2016)

The Revenue rules in relation to a retirement lump sum state that the maximum lump sum is 150% of Final Salary subject to having a minimum of 20 years service
The Scheme rules may be different. They may pay 150% after say 40 years service. 
If you have a separate AVC fund then you can ask Mercer to top-up the Scheme lump sum to the Revenue max lump sum.
It is also worth remembering that under the Revenue definition you can use gross salary (basic plus bonuses, BIK etc) when maximising the lump sum.
But if you are retiring early, then the benefits will be reduced as per Mercer statement.


----------



## jpd (9 Dec 2016)

The Revenue rules indicate the maximun that can be taken tax-free. The lump-sum amount that the scheme will pay is determined by the scheme's rules and may well be less than the allowed Revenue maximum. it is unlikely that the scheme can change it rules to allow a higher tax-free sum


----------



## JoeRoberts (9 Dec 2016)

jpd said:


> The Revenue rules indicate the maximun that can be taken tax-free. The lump-sum amount that the scheme will pay is determined by the scheme's rules and may well be less than the allowed Revenue maximum. it is unlikely that the scheme can change it rules to allow a higher tax-free sum


Schemes now are often quite happy to pay out to the Rev max. Generally there is a provision to allow this with employer/trustee consent. Depending on the commutation factors it lowers the funding liability for the scheme. So win win.
Worth asking.


----------



## Homer (12 Dec 2016)

It would be fairly unusual for a DB scheme not to allow members to take up to the Revenue maximum lump sum. However, some schemes limit the amount of pension that can be exchanged for a lump sum to something less than Revenue maximum, either by only allowing a strict 3/80ths per year of service or by excluding some elements of remuneration from the lump sum calculation. Having said this, most of these schemes allow members who have paid AVCs to use these AVCs to bridge the gap between the maximum permitted commutation and the Revenue maximum lump sum.

For Revenue maximum purposes, final remuneration can be calculated in one of three ways.

Basic annual salary at date of retirement or leaving service plus the average of fluctuating emoluments over the previous 3 years or longer.
Basic annual salary in any one of the 5 years preceding date of retirement or leaving service plus the average of fluctuating emoluments over a period of 3 years or longer ending on the last day of the year used to determine basic annual salary.
Total emoluments over any period of 3 or more years ending within 10 years of the date of retirement or leaving service.
Total emoluments can include any taxable pay or benefits such as company cars, medical insurance, bonus, overtime, etc. and can also include the value of shares provided under an approved profit sharing scheme and the value of tax free commuter tickets.

Where earnings are calculated over a period not coinciding with the member's date of leaving service or retirement, they can be adjusted in line with inflation over the intervening period.

As you can see from the above, the calculation of final remuneration for the purposes of determining Revenue limits is quite complicated and it's quite possible that the plan administrators may not be prepared to explore all options in order to arrive at the maximum possible figure.

For someone retiring at normal retirement age with 20 or more years service, the maximum permitted lump sum is the greater of (a) 3/80ths of final remuneration for each year of service (subject to a maximum of 40 years) or (b) 1.5 times final remuneration minus any retained lump sum benefits from previous employment or periods of self employment. A sliding scale applies to members with less than 20 years service.

Where a member leaves service before normal retirement age, the maximum lump sum at retirement is scaled back on a pro rata basis (i.e. you calculate the maximum lump sum based on potential service to normal retirement age and then multiply this by the ratio of completed service to potential service). Where benefits are drawn prior to normal retirement age by someone who has completed less than 20 years service with the employer, the sliding scale is also applied if this gives a lower result.

Of course, all of this may be TMI for the OP. If the main purpose of the question was to determine what salary figure would be used to determine his or her basic entitlement under the DB scheme, the answer is that it depends on the rules of the scheme, but is unlikely to include anything other than basic pay and quite likely to include an offset for the State pension. The scheme booklet should clarify the position in this regard and the member is also entitled to access the formal scheme rules on application to the trustees.


----------



## BOXtheFOX (6 Jan 2017)

Thanks for the replies.

My pension provider is basing my tax free lump sum on my stated salary as given to them by my employer.

However, I have had a look at my P60's for the last 3 years of work from back in the year 2000.

My salary for my last year of work is completely different to the previous 3 years. It is only coming in at about half of the previous 3 years.



Homer said:


> Total emoluments over any period of 3 or more years ending within 10 years of the date of retirement or leaving service.



My pension provider has only asked me for my last three P.60's in order to recalculate the tax free lump sum available to me. I assume that I can choose any three P60's over a 10 year period? As my salary was based on performance related pay I would have received different amounts over different years.

I am trying to maximise the tax free lump sum that is available to me

I understand that I can also claim for B.I.K, to be taken in to consideration.  On top of my basic salary I note that I paid about €5k in B.I.K.

Is B.I.K shown on a P60? Where do I get this information from?


----------



## Gordon Gekko (6 Jan 2017)

That's a bizarre dropping of the ball (to simply use the last three years).


----------



## Laramie (7 Jan 2017)

BOXtheFOX said:


> My pension provider has only asked me for my last three P.60's in order to recalculate the tax free lump sum available to me.


Let me guess. You are dealing with Mercer?


----------



## Homer (29 Jan 2017)

BOXtheFOX said:


> Thanks for the replies.
> 
> My pension provider is basing my tax free lump sum on my stated salary as given to them by my employer.
> 
> ...



You can choose any period of three or more years ending within 10 years of retirement. However, they have to be consecutive, so you can't just cherry pick any three non consecutive years. Please note that this means you can go back more than ten years, provided the period you choose ends within ten years of your date of leaving. These figures can be adjusted for inflation and include all emoluments, including BIK.

I don't think BIK was shown on P60s back in 2000, so you would probably need to produce a balancing statement to prove the amount of your BIK, unless your employer can provide verification.

You may have to push to get the administrator to use figures from earlier years, as this may be outside the scope of the service they normally provide. But at the very least, they should be prepared to use the 3 years immediately prior to your last year if there was a significant drop in earnings in that year.


----------



## Homer (29 Jan 2017)

Laramie said:


> Let me guess. You are dealing with Mercer?



I think most administrators take a simplistic approach to the calculation of final remuneration unless the individual pushes back. As most people are not familiar with Revenue rules, this probably means that a lot of people end up getting less commutation than the maximum allowed by Revenue.

Having said this, in general, earnings increase over time (and this would have been particularly true back in the 1980s and 1990s when inflation was quite high), so the broad bush approach probably gives the correct answer (or close to it) in the majority of cases. However, where there are significant fluctuating emoluments, the likelihood of an understatement is higher.


----------



## ricta (11 Apr 2017)

sorry to for bumping this but I am in a very similar siuation.

I'm wondering is it Gross Salary (before any superannuation deductions) or is it Taxable Salary (Total Pay on P60) that is counted for the Revenue Rules?

I need to push back to have the average of 3 consecutive years 2010 - 2012 used by the pension administrators, I'm unsure if I should use the Total Pay figures on the P60's, or the Gross figures before superannuation deductions.


----------

