buying back years

[1hibernia]

I am currently in the process of going to buy back some years for my pension to make it a bit larger when I retire. . I have only been in employment for 12 years in this country and am 58. Has anyone done this with their employer and do you think it is a good idea or an expensive proposition. I am employed in the public service. I would appreciate any advice as I find the area of pensions very confusing.

 

[Early Riser]

I take it you are considering buying "notional service" rather than "buying back years"? The latter would imply that you worked for a time in the public service but you were not paying pension contributions for some reason. If this is the case, then it is certainly good value to "buy back" that period of service by paying contributions now.

However, it is more likely that it is Notional Service to which you are referring. It is not a cheap to purchase such service. But it makes sense to purchase additional pension if you can afford it at all - tax relief makes it a very attractive way to save for the future. This is particularly so if you are paying tax at the marginal rate of 40% now? Any pension drawdown later will probably be at the lower rate, given your short service.

Basically there are two ways of purchasing additional pension - AVCs or Notional Service. There are advantages and disadvantages to each. It depends what you are aiming to achieve. AVCs are more flexible in that they allow you to maximise your tax free lump sum at retirement and to draw down any of the remaining amount from an ARF at a rate that suits you. On the other hand, Notional Service will give you a guaranteed level of increased pension for life in your main scheme annual pension, depending on your final pensionable salary and the quantity of service purchased. This guaranteed income may be good for longer term peace of mind.
You should be aware when purchasing Notional Service that some of the value will go towards providing for pension benefits for your survivor partner/spouse. This is not so with AVCs - the value of this fund is personal to you.

If you are unfamiliar with both it might be useful to start with a read of this booklet from The Pensions Authority : [broken link removed]

 

[Royal Blue]

My tuppenceworth, I’m buying notional service but it very much depends on individual circumstances.
There are a number of issues and assumptions that you will have to take into consideration.
What age do you plan to retire?
Are your 12 years of work so far in Ireland all pensionable in the public service ? As stated above, ensure firstly that all your public service is ‘reckonable’ (credited for pension purposes).
Public servants have different rules applying to their retirement largely depending on when they started work. You need to be sure of the conditions applying to you.

Your public service pension will be integrated with the State Pension (I.e. in effect the State Pension amount is deducted from your Public Service pension). So far many people, (low salaries / fewer pension years) it won’t make sense to ‘buy years’ - which can be expensive.
If I were you, I’d start by estimating your Irish State Pension - complicated by plans to introduce new calculation methods (and in your circumstances, possibly overseas credits).
When you have a good idea of your potential State Pension, then do some calculations, based on the integration of this with your potential Public Service pension.
When that is worked out, you can estimate how long you hope to live !
Good Luck !

 

[Early Riser]

Your public service pension will be integrated with the State Pension (I.e. in effect the State Pension amount is deducted from your Public Service pension). So far many people, (low salaries / fewer pension years) it won’t make sense to ‘buy years’ - which can be expensive.

I agree with you that it may not be worthwhile if the person is on a low salary (20% tax rate) and is going to be paying similar tax rate in retirement. But if a person is currently paying tax at 40%, and their retirement income is projected to be below this tax threshold, then it is surely worthwhile - whether they choose Notional Service or AVCs ?

Also, if because of limited service (and possibly limited State Pension entitlement) there total retirement income is low it does make sense to take advantage of tax relief now to make some extra provision for retirement. Notional Service is expensive but not when compared to buying an equivalent guaranteed pension income by way of an annuity. Admittedly there is more flexibility with an annuity, eg, omitting the survivor pension provision.

If a person has limited service and is paying tax at the top rate they should try to make extra pension provision if at all possible. Whether they go with Notional Service or AVCs is another matter.

So far many people, (low salaries / fewer pension years) it won’t make sense to ‘buy years’ - which can be expensive.

Why would "fewer years" be a factor in the choice? For two people on the same salary the cost of 2 additional notional years is the same, whether they currently have 30 years service or 10 years service. The issue is different in relation to lower salaries as they may not be the same tax relief advantage.

 

[Early Riser]

@1hibernia, I would suggest that, if nothing else, you consider contributing a sufficient amount to an AVC to bring your tax free lump sum up to the max allowed by Revenue. If you will have at least 20 years pensionable service at retirement, Revenue will allow you to top up the lump sum to 120/80 of pensionable salary. It looks like you may not have the 20 years but there are still top up opportunities.

I am taking it that your normal retirement age for your pension scheme is 65. If you have 12 years service already and work until then you should have about 19 years.. Your pension scheme lump sum should then amount to 57/80 of pensionable salary. But Revenue would allow you to top this up to 108/120 - that is an extra 51/80 of pensionable salary that can be taken from an AVC. Depending on your projected pensionable service you can check the relevant Revenue limits here at 7.2: https://www.revenue.ie/en/tax-professionals/tdm/pensions/chapter-07.pdf

 

[Royal Blue]

Issue of number of potential reckonable years is critical as to whether buying added years can be worthwhile given integration of State Pension with public service pension.

Rough example: 20 years reckonable service; final salary €50,000.
This would give pension of 20/80 x €50k = €12,500.
Subtract (full) State Pension of ~ €12,500.
This results in a net public service pension of zero. If someone has few reckonable years, it might make no sense at all to buy added years, depending on their eligibility for State Pension.
(As mentioned above, there is also the lump sum benefit to be factored in but this can be bought as a ‘last minute or late’ contribution, given 20 years service).
There is a lot of advantages to buying added years but do run the numbers and consider tax implications.

 

[G123]

It doesn't quite work like that - your State Pension will not wipe out your Superannuation Pension. You get credit for your pensionable service and the state pension is added to this.

 

[Early Riser]

Rough example: 20 years reckonable service; final salary €50,000.
This would give pension of 20/80 x €50k = €12,500.
Subtract (full) State Pension of ~ €12,500.

That is incorrect. Calculating on the basis of full State Pension only works when the person has, or will have, full 40 years service on retirement.

Taking your example - a post-2004 person (normal retirement age 65) and a pensionable salary of €50K and 20 years service.

In this case the lump sum would be about €37.5K and the Occupational Pension about €6.1 K. Their State Pension would be dependent on their total PRSI record (not just their PS years) but would be guaranteed to be not less than circa €6.4K.

If the person had 22 years service the figures would be approx as follows:
Lump sum of €41.3K and annual Occupational Pension of €6.65 K. Their State Pension would be guaranteed to €7.1K

Whether or not the person reckons it would be worth purchasing the 2 notional years is a different matter.