AVCs with full service

Gordon Gekko

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Hi,

Public Sector Pensions seem to be a minefield. A point was made in another thread which it would be good to see clarified.

If someone has full (i.e. 40 years’) service, am I right in saying that they can build an AVC pot equal to the amount that would be required to fund the State Pension via annuity purchase?

And if the value of that person’s AVC pot exceeds that amount, what happens to the excess? Is it, for example, subject to full income tax, USC, and PRSI at retirement?

Many thanks.
 

Conan

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The answer to your first question is YES, but assuming you are in the integrated scheme ie that your main scheme takes account of the State Pension (that you are an A Class PRSI contributor). If however you are a B of D PRSI contributor, then your occupational pension after 40 years will probably be close to the Revenue Max:
- a pension of 50% of Salary
- a lump sum of 150% of Salary
- a Widows/ Widowers pension on your death in retirement of 50% of your pension
- indexation of Pensions in payment
So assuming you will have 40 years in the Public Sector it’s likely that you are a B or D contributor and thus not entitled to a State Pension (old age pension). In that case you scope for funding AVCs is very limited. The potential scope might be:
- you may have some non-pensionable Income such as bonuses, BIK, allowances etc. basically any income that is taxable is potentially pensionable.
- the Revenue max Widows/ Widowers pension is 100% of your pension
- if your pensionable Salary in the Scheme is averaged over say 3 years, the Revenue definition might give a higher figure

As a general rule, I would say that Public Servants with 40 years service have limited scope to invest AVCs. If you did overfund (based on poor advice) then technically your main scheme benefits might be reduced so that overall you remain within Revenue limits. Such would be a very unusual outcome.
 

Gordon Gekko

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Hi Conan,

Thank you; it’s a pre 2004 Class A PRSI contributor who’ll have 40 years of service at age 60.

Am I right in saying that, assuming an annuity rate of 3%, they could have an AVC fund of €433k (i.e. €13k State Pension / 0.03)?

Gordon
 

Conan

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Only if the individual is a member of an "integrated " scheme, ie their pension is inclusive of the State Pension.
Example
Gross Salary €60,000
Pensionable Salary €35,000 (less 2x State Pension)
Scheme Pension 40/80 x €35,000 = €17,500
State Pension €12.500

Total pension €30,000
In that case they could fund AVCs as you suggest
 

Gordon Gekko

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Thanks Conan; that’s the exact scenario. So the person can fund for 1 x State Pension. Have you any idea what annuity rate is used and from what age?
 

Early Riser

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As a general rule, I would say that Public Servants with 40 years service have limited scope to invest AVCs. If you did overfund (based on poor advice) then technically your main scheme benefits might be reduced so that overall you remain within Revenue limits. Such would be a very unusual outcome.
Only if the individual is a member of an "integrated " scheme, ie their pension is inclusive of the State Pension.
Example
Gross Salary €60,000
Pensionable Salary €35,000 (less 2x State Pension)
Scheme Pension 40/80 x €35,000 = €17,500
State Pension €12.500

Total pension €30,000
In that case they could fund AVCs as you suggest
Conan, It is only of incidental interest to me but are you aware of any links to further information on "overfunding" in relation to AVC contributions to public sector pensions ? How precisely is overfunding determined in scenarios such as that posed by Gordon and how is the overfunding treated? Is there a difference in using the AVC fund to purchase an annuity and transferring it into an ARF?
I am aware that the usual taxes and USC would apply but what additional penalties apply and is their any information on how all this is determined?
 

Conan

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Thanks Conan; that’s the exact scenario. So the person can fund for 1 x State Pension. Have you any idea what annuity rate is used and from what age?
There is no fixed formula. However you have to work on the assumption of retirement at normal retirement age. As for annuity rate I think something around 3.5% would not be unreasonable.
 

Cityman

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Hi

Interesting post..thank you OP.

How would a situation where employee has 23 years public sector employment and 18 years of semi state employment?
The semi state pension was kept as preserved pension (could have been transferred over to new employer) but both are payable at 60..class D employee.

Can such a person still fund an AVC towards the 17 years of missing public service pension? .. or does the 18 years of semi state pension negate this?

Any thoughts?
 

Cityman

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Hi

Interesting post..thank you OP.

How would a situation where employee has 23 years public sector employment and 18 years of semi state employment?
The semi state pension was kept as preserved pension (could have been transferred over to new employer) but both are payable at 60..class D employee.

Can such a person still fund an AVC towards the 17 years of missing public service pension? .. or does the 18 years of semi state pension negate this?

Any thoughts?
Can anyone advise on this? TIA
 

Slim

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Can anyone advise on this? TIA
Hi. Not expert but have checked this out in the past. The pension and lump sum from each employment would be amalgamated and the total tax-free lump sum can't exceed Final Salary x 1.5. So, it would be doubtful if such a PRSA would be worthwhile or even approved. Others, more knowledgeable, may chip in here!
 

Cityman

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Hi. Not expert but have checked this out in the past. The pension and lump sum from each employment would be amalgamated and the total tax-free lump sum can't exceed Final Salary x 1.5. So, it would be doubtful if such a PRSA would be worthwhile or even approved. Others, more knowledgeable, may chip in here!
ah thank you for that.
A point of note is I took my pension lump sum along with VSER way back .. it was obviously reduced for early draw down.
I wonder where I could go to get definitive information as to where I stand? Would revenue be any use? TIA
 

Conan

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I think what you are saying is that you waived your right to the pension lump sum from the earlier scheme under. SCSB in order to maximize the after tax value of the voluntary severance package.
In terms of working out whether you have any real capacity for AVCs you could talk with the organization who manage your public sector AVC Scheme (perhaps Cornmarket). However make sure that they run the numbers rather than just “selling you” AVCs on the basis of tax relief.
 

Live Well

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Hi Conan, all,

Can I ask you what questions you would ask a company, like Cornmarket, to see if there was real capacity for an AVC?

Based on my interpretation of your advice above, as a post 2004 and pre 2012 public sector employee with an integrated scheme (Pension + State Contrib) then I could use an AVC to make up the difference between Pension and the Revenue Max rate of 50% of your final salary. In that case, I could at retirement get my Pension + my AVC to equal the Revenue max 50% and then recieve the State Contrib on top...it doesn't seem correct but that's how I'm reading it.

I'm going to seek advice to find out about how the AVC could work for me but all I've been told so far is that while my Total Pension (Pension + State Contrib) may be already maxed out at Retirement, I am still saving money as I am paying less tax now and when I draw down the pension if I have overpaid I will be taxed at 20% so I am still saving money...again I'm not sure about this logic without seeing the numbers.

Appreciate any guidance you can provide. I'm trying to read \ research my way to understanding how best to maximise my tax and pension.

Thank you.
 

Conan

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The Revenue limit is a Pension of 2/3rds of Final Salary (inclusive of any pension surrender for a lump sum). In the case of Civil Servants, the max Pension of 50% of final Salary PLUS a lump sum of 150% of Final Salary is equivalent to Revenue max. However you are also entitled to get any State Pension on top.
So if your occupational pension is “integrated” (ie reduced to take the State Pension into account), then you could fund AVC’s to add back the State Pension. That should provide plenty of scope for AVC’s.
You cannot overfund now (and get 40% tax relief) in the expectation of somehow only paying 20% tax on the excess funding. You just cannot deliberately overfund.
Cornmarket (or whoever) must work out what your potential shortfall will be and then calculate the max level of AVC (subject to the maximum contribution limits for tax relief). So it’s not about tax relief first. It’s about calculating the difference between your scheme benefits and the Revenue maximum benefits. The level of AVC’s then follows.
 

Itchy

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You just cannot deliberately overfund.
Cornmarket (or whoever) must work out what your potential shortfall will be and then calculate the max level of AVC (subject to the maximum contribution limits for tax relief). So it’s not about tax relief first. It’s about calculating the difference between your scheme benefits and the Revenue maximum benefits. The level of AVC’s then follows.
Just to expand further Conan, in the case of a self-directed AVC, no such advice exists. There is no one stopping a contribution, Revenue are refunding tax-relief up to the limits available.

When you say it cant be done, what exactly is stopping one from overfunding? In the event of overfunding do you not just pay tax on the excess?
 

Conan

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Itchy
Not that simple.
Any AVC must be linked to an Occupational Pension. That Scheme must have Trustees or a Pensioneer Trustee (if it’s a self-administered Scheme). If the AVC Scheme is attached to the main scheme then the scheme administrator must ensure that any AVC’s are not patently overfunding. If you operate a “stand-alone AVC”, then the administrator of such must ensure similar no overfunding.
In the event of actual overfunding, then all the AVC fund must be used to provide appropriate benefits and the Main Scheme benefits reduced to remain within Revenue limits. There is no facility to just pay tax on the excess.
 

Early Riser

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Any AVC must be linked to an Occupational Pension. That Scheme must have Trustees or a Pensioneer Trustee (if it’s a self-administered Scheme). If the AVC Scheme is attached to the main scheme then the scheme administrator must ensure that any AVC’s are not patently overfunding. If you operate a “stand-alone AVC”, then the administrator of such must ensure similar no overfunding.
How does that work in practice in the context of a coordinated public sector scheme ?

Say Sean has a NRA of 65 and at 42 with 17 years of service accumulated, he approaches Cornmarket (say) to take out an AVC. He thinks he would like to take Cost Neutral Early Retirement between 55 and 60. He wants to max up AVCs to prepare for this. There is nothing to stop him doing so, afaik. He subsequently postpones retirement until 65 when he will have full service. Who checks on this, and at what stage, to check for possible overfunding? If he opts to transfer his AVC pot at retirement to an ARF is there a limit to the amount and, if so, how is this calculated ?
 

Conan

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Firstly you cannot fund AVC’s in the expected anticipation of possibly retiring early. The initial calculation must be done on the basis of normal retirement.
In the event of overfunding, one cannot simply transfer the AVC pot to an ARF. The scheme Trustees/ Administrator must ensure that the overall benefits at retirement are within Revenue limits. If the combined AVC and main scheme benefits combined are in excess of Revenue limits, then the Trustees must reduce the main scheme benefits so that the combined benefits now fall within Revenue limits. So the AVC excess are effectively wasted.
 

Early Riser

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Firstly you cannot fund AVC’s in the expected anticipation of possibly retiring early. The initial calculation must be done on the basis of normal retirement.
Thanks, Conan. But how does that work in the context of a coordinated pension? There clearly is scope to fund to some extent, even with projected full service, as the amount of state pension can be funded for (ie, 50% of pensionable salary minus state pension) ? Depending on AVC fund performance this could easily overshoot (or undershoot) the mark. Is there some rule that the AVC company must follow or is there a large amount of discretion? Even if there is an initial agreed AVC purchase amount the employee can easily change this (ie, increase it) over future years. How is this "policed"?

Also, I note that some of the explanatory booklets on PS schemes indicate that one of the key differences between AVCs and Notional Service purchase is that the former can be used to save towards early retirement whereas the latter can only be purchased if there is a projected shortfall at NRA. If you can purchase AVCs even with projected full service there clearly is potential to overshoot. I do not think this is monitored by anyone during service at least.

In the event of overfunding, one cannot simply transfer the AVC pot to an ARF. The scheme Trustees/ Administrator must ensure that the overall benefits at retirement are within Revenue limits.
Who would be the scheme Administrator/Trustee with this role in a typical public sector scheme - say for a HSE employee? Is it the pension/payroll office?
 
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