AVCs with full service

Interesting thread….In terms of pension limits you can build up over a lifetime in work, can anyone tell me how do I know I am not overfunding my pension benefits?

I’m a relatively late entrant to the public sector in my-30’s, and am trying to stretch to max out things via an AVC too annually as I go, throughout my career.

I’m in the post 2013 pension scheme. What should I be/not be doing?

I’ve taken out the AVC independently, and not through Cornmarket, so how can I do a computation myself?
 
Conan said:
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.
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Excellent thread, thanks all.

Conan you raised the possibility of Avc's possibly being wasted above.

Is this possible in the case of older entrants (term escapes me, apologies) such as my wife, indeed a colleague of hers mentioned to her that as she has contributed to AVC’s since beginning employment at 22 (now 42) she is most likely paying too many AVC’s which scarily ties into your suggestion above.
Would you have an opinion as to whether from an efficiency point of view is she is paying too much in AVC’s and if this should instead be taken as income which would allow, either
  • Pay down the mortgage
  • My wife to take out a separate pension rather than continue to pay into AVC’s.
  • Allow myself to increase an executive pension I'm paying into.
She is hoping to retire at 55 at the latest but earlier if possible (she mentioned the idea of buying years but unsure if this is possible.
77k - current avc fund
222k - projected value
450 per month contributions

It's crazy to think she could effectively be wasting the payments into Avc's as per above?
Thanks all
 
1eyeonthefuture said:
Is this possible in the case of older entrants (term escapes me, apologies) such as my wife, indeed a colleague of hers mentioned to her that as she has contributed to AVC’s since beginning employment at 22 (now 42) she is most likely paying too many AVC’s which scarily ties into your suggestion above.
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1eyeonthefuture said:
She is hoping to retire at 55 at the latest but earlier if possible (she mentioned the idea of buying years but unsure if this is possible.
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Whatever about overcontributing if she works to 65, she certainly has good possibilities for early retirement. Given the numbers above your wife is presumably a pre - 2004 (but post 1995 entrant) paying Class A PRSI. She has a normal retirement age of 60 (of course she can work longer but she can take full pension benefits from this age). She can also take cost neutral early retirement anytime from 50.

If your wife takes early retirement she can use some of the AVC fund to top up her retirement lump sum (not up to 150% of salary - there is a partial Revenue reduction limit in the case of CNER). She could put the remainder in an ARF to draw down - particularly in the interval between retirement and State Pension age. The drawdown at this stage would be subject to PRSI at 4% as well as tax and USC. As a Class A contributor she is on a coordinated pension - taking state benefits/pension into acccount.

If she is not going to retire early I suggest she contact Cornmarket (or other provider) for a review and to discuss posssible overfunding. However, even at that she has a funding space of 0.5* pensionable salary minus State Pension.
 
Early Riser said:
If your wife takes early retirement she can use some of the AVC fund to top up her retirement lump sum (not up to 150% of salary - there is a partial Revenue reduction limit in the case of CNER).
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Could you please enlarge on how this might be calculated?
 
Strictly speaking, under Revenue rules you are not supposed to invest AVC’s in anticipation of retiring early. The ability to pay AVC’s is supposed to be based on the likelihood of a difference between the eventual Main Scheme benefits and the Revenue maximum at Normal Retirement Age.
However it is not unknown (common) for individuals to invest AVC’s in anticipation of actually retiring early. However assuming one does retire early it needs to be borne in mind that whilst the Main Scheme benefits will be reduced, so too will the Revenue maximum.
For Public Servants in the old DB Scheme it should be relatively easy to estimate if there will be a shortfall at NRA. This will facilitate AVC’s. For members of the post 1995 Integrated Scheme , there should be plenty of scope (even with full service) since one can use AVC’s to add back the State Pension (currently circa €13,000 pa ) which could have a capital value of c€300,000. For members of the newer post 2013 hybrid scheme, the calculation is much more complicated, but likely to be plenty of scope for AVC’s.
The essential point I would make is that it is pointless deliberately overfunding. Your unlikely to be able to use any excess funding at retirement (it cannot be taken as a taxable lump sum, it cannot be transferred to an ARF). That said it is very rare in my experience to see someone overfunding due to AVC’s. In general I see little point in paying AVC’s in one’s 30’s (accelerate mortgage payments instead) but as one moves into ones 40’s and 50’s then one should begin to focus more on the financial aspects of retirement.
The whole area is complicated and ideally individuals should get professional advice. But just investing AVC’s to benefit from tax relief is going about it the wrong way.
 
Slim said:
Could you please enlarge on how this might be calculated?
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Hi Slim, I'm away at the moment so restricted in my access. From memory I think it is maximum lump sum attainable under the pension scheme by years served divided by years attainable if person served until NRA ( provided a minimum of 20 years served).
For convenience, say a pre-2004 PS with a NRA of 60 who takes CNER at 55 with 20 years service and a pensionable salary of 100k(!) So max under Revenue is 150k×20÷25=120k.

As the actual occupational lump sum for this person would be 100k×20×3÷80=75k, they could potentially top up by 45k from an AVC.
Hope my sums (and memory) are right.

Edit: The actual Occ Pen lump sum in this example would be slightly less than 75k under CNER. So the potential AVC top up is greater.
 
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I have a very technical question regarding the maximum allowable lump sum upon early retirement for civil servants.

In relation to the formula set out by Early Riser (LS x N/NS) - for pre-2004 civil servants, for the purpose of calculating the NS, can normal retirement be deemed as age 60 or must 65 be used? [The question is worded technically but if you know the answer, you'll understand the question!]
 
elacsaplau said:
I have a very technical question regarding the maximum allowable lump sum upon early retirement for civil servants.

In relation to the formula set out by Early Riser (LS x N/NS) - for pre-2004 civil servants, for the purpose of calculating the NS, can normal retirement be deemed as age 60 or must 65 be used? [The question is worded technically but if you know he answer, you'll understand the question!]
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No - The scheme you are in has a specified NRA. Pre-2004 it is generally 60. Post 2004 it is generally 65. (There are exceptions for some sectors, eg, Gardai). I don't know for the new Single Scheme.
 
Hi Early Riser

Just want to be sure to be sure here.

The individual in question has always worked in the Dept of Education. The NRA for a Pre-2004 member is 65 - I'm certain of this. But retirement from 60 onwards (whilst based on service accrued to the date of retirement) is not subject to an actuarial reduction in respect of early payment.

So the question is what is the Rev Max Lump Sum for a pre-2004 civil servant who retires at age 60 with 30 years service.

Is it (a) 1.5 earnings x 30/30 or (b) 1.5 earnings x 30/35?

Thanks
 
elacsaplau said:
Hi Early Riser

Just want to be sure to be sure here.

The individual in question has always worked in the Dept of Education. The NRA for a Pre-2004 member is 65 - I'm certain of this. But retirement from 60 onwards (whilst based on service accrued to the date of retirement) is not subject to an actuarial reduction in respect of early payment.

So the question is what is the Rev Max Lump Sum for a pre-2004 civil servant who retires at age 60 with 30 years service.

Is it (a) 1.5 earnings x 30/30 or (b) 1.5 earnings x 30/35?

Thanks
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I think we are just getting confused in terminology. By NRA is meant the age from which a person can take their full accumulated pension benefits without actuarial reduction. I know that pre 2004 people can work until 65 and accrue pension benefits until then.But the NRA is 60. Post 2004 people cannot take full benefits before 65, ie, 65 is their NRA.

On to your example above. If retiring at 60 she has reached NRA and can take full benefits.With 30 years service the lump sum from her scheme should amount to 3×30×pen.salary÷80. But under Revenue rules she could take up to 1.5 times pen.salary.So if she had an AVC she could top up to this level.
 
Some fantastic info and lots to think about on this thread.. Am perturbed by my lack of fundamental knowledge around a subject that has such far reaching consequences.
Thanks all

Early Riser said:
However, even at that she has a funding space of 0.5* pensionable salary minus State Pension.
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Sorry and excuse my ignorance here but could you spell out what you mean here. Thanks

Conan said:
In general I see little point in paying AVC’s in one’s 30’s (accelerate mortgage payments instead) but as one moves into ones 40’s and 50’s then one should begin to focus more on the financial aspects of retirement.
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On the evidence of this it would seem she has done this back to front and it might make sense for the Avc payments to stop and instead use to clear the mortgage off.
Just did the maths using an overpay calculator and this would reduce term to 7 years, thereafter my own exec pension could be loaded for a number of years.
Think I def need to get the cornmarket rep out to run the different scenarios for us.
Appreciated all.
 
@1eyeonthefuture,
Under Revenue rules when a pension provides for a tax free lump sum of up to 1.5 of salary, the max annual pension allowed is 0.5 of salary. But for public servants paying Class A PRSI the max annual occupational pension payable is 0.5 of salary minus the value of the state pension ( a " Coordinated Pension"). The state pension is not covered by Revenue rules leaving a space for top up funding from AVCs.

Say a PS on 100k with full service retires after reaching NRA. Her annual Occ Pension would be 37k (50k - 13k state pension value). So it would be possible for her to fund up to this value from an AVC fund. I do not know how this value is calculated, particularly if the retiree opts for an ARF. Conan also refers to this in his reply to your post above and in other threads. So even if your wife opts not to retire early she still has this space to use her AVC fund. Whether or not this is the way to go I can't say.
I would certainly go for the Cornmarket review though.
PS. Consider what tax your wife is likely to pay at pension drawdown time. Personally I wouldn't pay AVCs for tax relief if I was likely to be paying top rate tax at eventual drawdown. I know there are different views on this. It is less likely to be an issue in the case of early retirement.
 
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The most tax effective use of AVC's is topping up the lump sum to the Revenue max. So tax relief on the contributions but no tax on the additional lump sum.
Doing similar for Pension may not be tax effective if you will pay tax at the top rate in retirement.
 
A "last minute" AVC seems to be a very good option. It can only be done in the year you retire but a great way to funding any shortfall you might have and bringing your lump sum up to the revenue max.
 
What exactly is a "last minute" AVC - as in, how precisely does it differ from your every day AVC? Are there any notes that explain the technicalities of how it works?
 
No idea, no mention of state pension. My read is the same as yours Early Riser. For example the benefit is not highlighted in example 2 either.
 
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