Buying Service DB Pension

[dino]

Hi, I have paid into a DB pension for the last 20 years. I would like to retire at 60 but that will only give me 34 years service. I have a good wage in a semi state and I have considered starting AVC’s.
I recent heard of the option to buy service so I enquired with our pension provider. It will cost me around €150k to buy 6 years service. This will give me approximately €6k extra per year and will add €24k to my lump sum. I am interested in doing this as I have some savings and investments.
I am trying to work out if it would be better to buy service or do AVC’s?
Also what are the tax implications of buying extra service? Should I spread it over a few years to get the best tax incentive? I am in my 40’s so I believe I could put 25% of my salary into AVC’s but is this the same buying service?
Thanks

 

[Threadser]

You may want to consider that you will need to live quite a long time into your retirement to get the benefit of your €150k if you opt to buy service. I don't have the expertise to compare this option to buying AVCs.

 

[Conan]

A couple of points to bear in mind:
- buying “added years” means you are buying extra lump sum and extra pension. Whilst the extra lump sum is tax free, the extra pension is potentially liable to tax (perhaps at 20% or 40%).
- the costs of buying those extra 6 years is very tax effective in respect of the tax free lump sum (ie tax relief on the contributions but the additional lump sum is tax free). However since the additional pension generated is likely to be taxable , this element might be a “zero sum game”. If you get tax relief at say 40% on the contributions but will be liable for say 40% Income Tax (plus USC) on the additional pension, that’s not such a great deal.
- so you need to consider what the tax relief rate will be but also what will be the likely marginal tax rate on the additional pension income. If you get 40% relief on the contributions but you estimate your marginal tax on the additional pension income will be only 20% (or less) then that improves the tax efficiency
- investing into AVCs instead allows you fund just for the additional tax free lump sum only. So you might only invest sufficient to build up a fund of say €24k and then take the full AVC fund as an additional tax free lump sum.
- if you build up an AVC fund in excess of €24k, then the excess has to be used to provide an additional pension income ( either buying an Annuity or invested into an ARF).

The €150k cost you mentioned is presumably spread over the years to your retirement (I assume 14 years to go to age 60). So you might need to consider whether the annual cost (in addition to your normal contributions) is affordable (as well as tax effective). AVCs targeted at just the additional lump sum will be clearly less “costly”.
I hope this helps