# Public Service Pension drawbacks (if any)



## imalwayshappy (12 Feb 2021)

I was speaking with a friend of mine about pensions in the public sector. Am I right in saying that although the public sector receive a very generous lump sum and a guaranteed pension for the rest of their life from an estate planning perspective there would be nothing to leave their children (except the lump sum) when they die post retirement. 

On a private pension if my fund is 1.5m this could be passed to my kids if I die 5 years into retirement however a public servant who receives lets say 40k a year in retirement for 5 years passes away the "fund is gone" or perhaps the spouse might get half the pension depending on the scheme.

I find it an interesting topic as many (not all) people would like to pass wealth to the next generation however with the public service pension this may not be the case. Of course I stand open to correction on the above.


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## Conan (12 Feb 2021)

The basic premise of a Pension is that it provides an income to a retiree during retirement and possibly to a surviving spouse in the event of the retiree pre-deceasing the spouse. It was never intended as a inheritance structure for children (who in many cases may be coming close to retirement themselves by the time both parents have died). 
The Public Service Pension is as you outlined, and considered by many as a very generous structure (at least the old DB scheme). 
in relation to a private sector DC arrangement, if your retirement fund was €1.5m you can take 25% as a lump sum (some tax to be paid on excess over €200k) and the remaining 75% could be invested in an ARF. On your death in retirement, a surviving spouse “steps into the shoes” of the deceased and continues with the ARF. On the spouses death, the balance - if any - can go to children (but with a tax hit). This for some is the attraction of ARFs over buying an Annuity. But an ARF is a complicated structure requiring the retiree to manage the investment risk profile, the level of drawdown so as not to run out of funds whilst still alive. The attraction of the PS Pension is that it is a guaranteed income for life. The ARF carries the risk that you outlive the fund. 
I accept that many (some) would like to pass wealth to the next generation, but that’s not the function of Pensions or ARFs. The primary objective of these structures is to provide income for the retiree and ensure (as far as possible ) a secure and comfortable retirement. Remember that a male retiring at age 65 has almost a 50% chance of living to 90 and beyond (typically longer for females). So I strongly recommend that retirees focus on their own financial security first, before worrying about leaving assets to “children” who may well be close to retirement themselves by the time both parents have died.


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## NoRegretsCoyote (12 Feb 2021)

Conan said:


> The ARF carries the risk that you outlive the fund.



For many people that is the benefit


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## imalwayshappy (12 Feb 2021)

Conan said:


> The basic premise of a Pension is that it provides an income to a retiree during retirement and possibly to a surviving spouse in the event of the retiree pre-deceasing the spouse. It was never intended as a inheritance structure for children (who in many cases may be coming close to retirement themselves by the time both parents have died).
> The Public Service Pension is as you outlined, and considered by many as a very generous structure (at least the old DB scheme).
> in relation to a private sector DC arrangement, if your retirement fund was €1.5m you can take 25% as a lump sum (some tax to be paid on excess over €200k) and the remaining 75% could be invested in an ARF. On your death in retirement, a surviving spouse “steps into the shoes” of the deceased and continues with the ARF. On the spouses death, the balance - if any - can go to children (but with a tax hit). This for some is the attraction of ARFs over buying an Annuity. But an ARF is a complicated structure requiring the retiree to manage the investment risk profile, the level of drawdown so as not to run out of funds whilst still alive. The attraction of the PS Pension is that it is a guaranteed income for life. The ARF carries the risk that you outlive the fund.
> I accept that many (some) would like to pass wealth to the next generation, but that’s not the function of Pensions or ARFs. The primary objective of these structures is to provide income for the retiree and ensure (as far as possible ) a secure and comfortable retirement. Remember that a male retiring at age 65 has almost a 50% chance of living to 90 and beyond (typically longer for females). So I strongly recommend that retirees focus on their own financial security first, before worrying about leaving assets to “children” who may well be close to retirement themselves by the time both parents have died.



100% agree with all of the above. A pension should be to support you through your retirement years but If you were happy to live off the 4% distribution each year and didn't touch the capital (assuming your ARF made a 4% return) it is a nice to know that you are passing the capital onto the next generation. With a DB plan you don't have that option. A DB plan in some respects is like an annuity, if you die 2 years into retirement it is a wasted 35+ years of working with nothing to pass on.


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## NoRegretsCoyote (12 Feb 2021)

I always think the lack of flexibility of a PS pension is a reason to discount its value in open-market terms.

Suppose a €30k annuity costs €1m. Is it fair to say that a PS pension of €30k is like having an ARF worth €1m? I really don't think so.

The person with an ARF of €1m has the choice to use none, some, or all of it on an annuity. The PS pensioner has no such right.


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## Threadser (12 Feb 2021)

This is rarely highlighted when people discuss the much envied "gold plated" public sector pensions. It is true that a spouse is entitled to half of the pension entitlement should they outlive their partner, but as there is no "fund" as such then it is not possible to to will any remaining funds to their children when they die post retirement. I agree that this isn't the purpose of a pension fund though.

Also if a single person  dies within a couple of years of retirement and has made significant contributions over maybe 40 years, their contribution dies with them (apart from the lump sum which they will have drawn down on retirement).


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## Laughahalla (12 Feb 2021)

Threadser said:


> Also if a single person  dies within a couple of years of retirement and has made significant contributions over maybe 40 years, their contribution dies with them (apart from the lump sum which they will have drawn down on retirement).



Is that not the same as a private pension Annuity? 

Of course the person in the public sector pays towards their pension ( which is guaranteed) it's only a token contribution compared to what a private sector worker would have to pay for the same pension. The DC pension amount is also not guaranteed come retirement.


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## Conan (12 Feb 2021)

It can be easy to focus on the person who dies 2 or 5 years into retirement in a DB scheme and the estate get nothing (particularly if there is no spouse). But the average life expectancy for a retiree at 65 is now some 20 years (male) and 24 years (female). The PS pension is guaranteed foe life, includes a level of indexation and also has an attaching spouses pension (Plus the retirement lump sum). The capital value (Annuity value) of such a benefit could be valued at some 40 times the pension (depending on assumed indexation rate). 
As I mentioned earlier, the ARF route carries two major risks:
- the investment strategy adopted, the risk of capital loss and the potential for the fund to decrease over time
- the potential for the retiree to outlive the fund, either because of poor or negative investment performance or because of excessive drawdown of income.
And the reality is that most ARF investors tend to adopt a conservative/low risk investment strategy, thus (in the recent/current investment environment) likely to result in net negative growth (after allowing for investment charges and the minimum 4%/5% drawdown), thus resulting in a fund that will gradually reduce in value over time. 
That‘s why I say that anyone retiring from a DC scheme probably needs expert advice to ensure that they are making an informed decision that focuses on their retirement ( and not on some notion of leaving pension assets to “children”).


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## imalwayshappy (15 Feb 2021)

Laughahalla said:


> Is that not the same as a private pension Annuity?
> 
> Of course the person in the public sector pays towards their pension ( which is guaranteed) it's only a token contribution compared to what a private sector worker would have to pay for the same pension. The DC pension amount is also not guaranteed come retirement.



To a degree yes but the key point is with a DC plan you choose what to do with your funds whether you go the annuity route or not. You don't have that option with a PS pension fund.


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## Conan (15 Feb 2021)

imalwayshappy said:


> To a degree yes but the key point is with a DC plan you choose what to do with your funds whether you go the annuity route or not. You don't have that option with a PS pension fund.


That’s no different to a Private Sector DB scheme. The issue is not Public Service v DC. It DB v DC. Both systems have advantages and disadvantages.


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## Threadser (15 Feb 2021)

Laughahalla said:


> Of course the person in the public sector pays towards their pension ( which is guaranteed) it's only a token contribution compared to what a private sector worker would have to pay for the same pension. The DC pension amount is also not guaranteed come retirement.


This may have been true in years gone by but is not necessarily the case now. The pension levy ensures that PS workers pay quite a considerable amount extra towards their pension and rightly so. Also PS workers pension includes the state pension entitilement which in my experience is rarely subtracted when direct comparisons are made. Those in the "Single scheme" pension since 2013 have a far inferior scheme to their predecessors but the narrative around gold plated pensions hasn't really caught up with the reality. What can sometimes be a "token" contribution is the amount of PRSI payments (10 years?) required for a full state contributory pension for those outside the public service schemes.


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## PebbleBeach2020 (15 Feb 2021)

If you retire with lump sum.of say 150,000 and pension of 50,000 from a public service post 1995 pre 2013 defined benefit scheme. Is there any avenues open to doing an avc and taking all cash on retirement to bring you to the 200k threshold for a tax free lump sum. 
Or can I do an avc and build pot of 350k and take it all in cash paying the 60k tax in conjunction with my public sector lump sum of 150k.


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## imalwayshappy (15 Feb 2021)

Conan said:


> That’s no different to a Private Sector DB scheme. The issue is not Public Service v DC. It DB v DC. Both systems have advantages and disadvantages.



Yes you are 100% correct.


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## Conan (15 Feb 2021)

PebbleBeach2020 said:


> If you retire with lump sum.of say 150,000 and pension of 50,000 from a public service post 1995 pre 2013 defined benefit scheme. Is there any avenues open to doing an avc and taking all cash on retirement to bring you to the 200k threshold for a tax free lump sum.
> Or can I do an avc and build pot of 350k and take it all in cash paying the 60k tax in conjunction with my public sector lump sum of 150k.


If in the example you quote, the Final Salary is €100,000 (so 50% Pension plus 150% lump sum), the answer is NO
If however this is a Post 1995 (Inregrated Scheme) then the Pension of €50,000 would be inclusive of the State Pension (Scheme Pension of c€37,000 + State Pension of c€13,000). So technically, you could invest AVCs to increase the €37,000 scheme pension up to €50,000.
But if the €150,000 represents 150% of Final Salary, then you cannot use AVCs to increase that  to €200,000.
The Revenue lump sum limit is 150% of Final Salary. The first €200,000 of any lump sum is tax free, but you would need to have a Final Salary of c€133,000 to be able to take €200,000 as a lump sum.


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## Protocol (15 Feb 2021)

Laughahalla said:


> Of course the person in the public sector pays towards their pension ( which is guaranteed) it's only a token contribution compared to what a private sector worker would have to pay for the same pension.



Somewhat off-topic, but I do not agree with the word "token" here.

PS pay 6.5% of salary, plus since 2009 they pay the PRD at 10% of salary.

I fully accept that the pre-2013 PS pension is good, and I accept that the employee contributions cover less than half the costs.

Also, as part of the pay restoration, the 10% PRD starts at 32k/34k.

If you are a PS on above 35k, you face a pension cont on extra income of 16.5%, I would not call that a "token".


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## NoRegretsCoyote (15 Feb 2021)

Protocol said:


> If you are a PS on above 35k, you face a pension cont on extra income of 16.5%, I would not call that a "token".


Not forgetting there is no tax relief on the PRD.

Am not convinced the contributions for high earners (say >€65k) are disproportionate to the benefits.


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## Early Riser (15 Feb 2021)

Protocol said:


> PS pay 6.5% of salary



Not quite. I believe it is 3% gross remuneration plus 3.5% *net* remuneration (ie, gross remuneration - State pension*2).
.
So for a full time person on a gross of €46,000 the contribution is €1380 + €700 = €2080 = 4.5% of gross remuneration.

This is before PRD, of course (are they still seperate deductions or has it all been integrated now?).


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## messyleo (15 Feb 2021)

And also you are stick paying 2.5% extra (I think) for spouses' pension even if you never marry and are single!


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## Threadser (15 Feb 2021)

Early Riser said:


> Not quite. I believe it is 3% gross remuneration plus 3.5% *net* remuneration (ie, gross remuneration - State pension*2).


Is this true? I have never heard the 6.5% being broken down like that.


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## Early Riser (15 Feb 2021)

gravitygirl said:


> And also you are stick paying 2.5% extra (I think) for spouses' pension even if you never marry and are single!



No - the 3%+ 3.5% includes the Spouses' pension.


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## messyleo (15 Feb 2021)

Early Riser said:


> No - the 3%+ 3.5% includes the Spouses' pension.



Apologies I didn't mean on top of the 6.5% I just meant you *have* to pay into a spouses pension scheme/cover even if you don't have one! 
Also it's only 1.5% to correct my earlier post but still, I'll never be using it so it grates a lot!


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## Early Riser (15 Feb 2021)

Threadser said:


> Is this true? I have never heard the 6.5% being broken down like that.



It is true:

_"The personal contribution is 1½% of pensionable remuneration plus 3½% of net pensionable remuneration

Officers also pay contributions of 1½% of pensionable remuneration for spouses’ and children’s pension (question 30).

Pensionable remuneration is basic salary plus pensionable allowances. Net pensionable remuneration, for the purpose of contributions, is pensionable remuneration, less twice the maximum rate of Social Welfare Contributory Old Age Pension payable to a single person"
_
http://www.cspensions.gov.ie/faq2.asp#4   FAQ 4


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## Protocol (15 Feb 2021)

NoRegretsCoyote said:


> Not forgetting there is no tax relief on the PRD.



There is tax relief on the PRD.


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## Protocol (15 Feb 2021)

Early Riser said:


> Not quite. I believe it is 3% gross remuneration plus 3.5% *net* remuneration (ie, gross remuneration - State pension*2).
> .
> So for a full time person on a gross of €46,000 the contribution is €1380 + €700 = €2080 = 4.5% of gross remuneration.
> 
> This is before PRD, of course (are they still seperate deductions or has it all been integrated now?).




Yes, it is not a straight 6.5% of salary, as you say. I didn't go into the details as they are complicated.

The PRD is now renamed the ASC, and is made permanent.

It is still a separate line on the payslip.

The ASC is less for the PS in the new Single Scheme.


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## PebbleBeach2020 (15 Feb 2021)

Conan said:


> If in the example you quote, the Final Salary is €100,000 (so 50% Pension plus 150% lump sum), the answer is NO
> If however this is a Post 1995 (Inregrated Scheme) then the Pension of €50,000 would be inclusive of the State Pension (Scheme Pension of c€37,000 + State Pension of c€13,000). So technically, you could invest AVCs to increase the €37,000 scheme pension up to €50,000.
> But if the €150,000 represents 150% of Final Salary, then you cannot use AVCs to increase that  to €200,000.
> The Revenue lump sum limit is 150% of Final Salary. The first €200,000 of any lump sum is tax free, but you would need to have a Final Salary of c€133,000 to be able to take €200,000 as a lump sum.



That's penalising civil service employees isn't it?! Private sector and regardless of salary, you can build yr pension pot as much as you can or want. So as a civil servant is there no benefit or point in doing an AVC or pension if, I retire at 65 with 40 years service and final salary if 100k?

Is my only option to do so, if I wanted to go at say 60 with 35 years service and I top up (not buy notional service) to make my actuarially reduced lump sum and pension upto what I would receive with full service. Thanks.


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## Conan (15 Feb 2021)

Firstly, you cannot build up a “pension pot as big as you can” either in the Public or Private sector. There are Revenue rules in terms of how much benefits you can provide in an approved pension arrangement. 
If you have full service in the Public Service (pre 1995) then you effectively get the Revenue max:
- a pension of 40/80ths (50%) of Final Salary, plus
- a lump sum of 120/80ths (150%) of Final Salary
- attaching Spouses Pension 
So if you will have 40 years service by retirement at Normal Retirement Age (and are in the Pre1995 Scheme) then there may be little scope for AVCs.
Strictly speaking you are not supposed to be able to do AVCs in anticipation of retiring early, but I understand that some people can manage to do so.


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## PebbleBeach2020 (16 Feb 2021)

Conan said:


> Firstly, you cannot build up a “pension pot as big as you can” either in the Public or Private sector. There are Revenue rules in terms of how much benefits you can provide in an approved pension arrangement.
> If you have full service in the Public Service (pre 1995) then you effectively get the Revenue max:
> - a pension of 40/80ths (50%) of Final Salary, plus
> - a lump sum of 120/80ths (150%) of Final Salary
> ...


I'm post 1995 not pre. I started in 2006.


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