Cornmarket AVC

[allaround]

thanks Early Riser, in the event of a cost neutral at 62 I was of the belief that supplementary cannot be claimed until 65?

 

[Early Riser]

thanks Early Riser, in the event of a cost neutral at 62 I was of the belief that supplementary cannot be claimed until 65?

You are correct and I am wrong. Sorry.

You could still apply for the Jobseeker's at 62 (if meeeting eligibility) and remained "signed on" for the PRSI Credits afterwards. Then the Supplementary at 65. Your topped up lump sum from your AVC should be helpful in bridging the gap. If you have any left from your AVC fund after your tax-free top up, you could put in an ARF to help in the interval as well - provided you qualify for an ARF as opposed to an AMRF.

 

[allaround]

Thanks, my only issue is that if refused jobseekers at 62 could it go against psri credits for OAP at eligible age, if all positive i'd nearly increase avc to go at 60 with ARF to maximise income that's if I'm not mistaken

 

[Early Riser]

allaround - I recognise your dilemma. I don't think that you are going to get a clear black and white answer to this one. There is a question in the JB application as to whether you are available for, and looking for, full time work. You will have to confirm that you are in order to qualify. All I can say is that over the past 10 years I have encountered several retirees in esssentially similar situations to yours who have claimed Jobseeker's and remained signed on for credits afterwards. I don't think that any were actually seeking work - or keen to get back working!

 

[Conan]

My understanding is that Jobseekers Benefit is available to Class A PRSI ( but not to Class B or D). In addition, if getting Jobseekers, and over age 62, you are not required to be available and actively seeking employment. But Jobseekers Benefit is only payable for 9 months.

 

[Early Riser]

My understanding is that Jobseekers Benefit is available to Class A PRSI ( but not to Class B or D).

allaround has indicated that he is on Class A.

In addition, if getting Jobseekers, and over age 62, you are not required to be available and actively seeking employment

I am not sure if this is literally true (even if in practice, it is). I think that if over 62 you are not required to engage in the "activation process" (training, etc). An applicant would still need to complete the same application from in which it asks if you are available for, and looking for, work.

Monthly signing is also unlikely to be required after 62. Should allaround retire at 60,however, he will probably have to sign monthly. But I would think it unlikely (in practice) that he will be required to engage in activation if he is a bone fide retiree.

But Jobseekers Benefit is only payable for 9 months.

True, but if your circumstances haven't changed, then you can remain "signed on" for A credits. Signing for credits is annual.

 

[allaround]

thanks though what payment is available after the 9 months given supplementary is not available till 65?

 

[Early Riser]

thanks though what payment is available after the 9 months given supplementary is not available till 65?

If you are referring to Social Welfare, there is no payment "available" that I am aware of. You can remain signed on for Class A credits if you continue to meet the same conditions as for your Jobseekers claim. That's it. Unless you qualified for some other Social Welfare payment, such as Illness Benefit - but then you probably wouldn't be retiring on a cost neutral basis?

Other than Social Welfare you are relying on your Occupational Pension, your retirement lump sum and your ARF drawdown (if applicable). If you had been pre-2004 you could have applied for the Supplementary from 60. This is one of the big differences between these two schemes.

 

[allaround]

thanks Early Riser, thus it may be beneficial to fund an AVC for supplementing through maximising lump sum and pension via arf drawdown, that may bring it to near 100%, however, if 'over funding' an avc lets say hypothetically have €350k in at 62 (65k salary) and at that getting 83.6% (minus state) pension and 94.3% lump sun, that would be questionable to have so much in an arf?, any thoughts?, given could take 7.5k out of avc to maximise lump sum to 97.5k, or am I wrong?

 

[Early Riser]

That would be quite an AVC fund to have accumulated by the time you are 62! - Have you built up a lot already?

Others here will advise you better than me on this. However, personally, I would only pay into a fund if I was getting tax relief at the top rate - and up to a level that I could expect to draw down from the fund at the basic tax rate (after allowing for maxing up the tax free lump sum). Don't forget that you will also pay USC on any drawdown and 4% PRSI up to 66.

From what your posts indicate, I take it that you will have close to full 40 years service at 62 and, if so, your actuarially reduced Occ Pension may be in the region of 16K - 17K ? You can calculate for yourself what you could tax efficiently draw down, given your circumstances/allowances any other income you might have (including Jobseekers, if applicable, and State Pension from 67/68). Of course, you can leave any residual to your estate if that eventuality should arise. As I say, I would prefer to think in terms of how much I could tax efficiently draw down while still in this world and able to utilise it (accepting that I don't know how long/short that will be). I wouldn't aim to fund beyond this (nor, indeed, to over-stint now to achieve this).

As indicated, there are others around here better versed in these matters.

 

[Conan]

As I have indicated in other posts, it only makes sense to invest AVCs in the following circumstances:
- to maximize the tax-free lump sum
- to fund additional pension income that will be taxed at a lower rate in retirement than the tax-relief on the contributions

The main attraction is getting tax relief on contributions at say 40% and getting all the AVC fund back as an additional tax free lump sum, because the lump sum payable under the scheme Rules is not at the Revenue max (perhaps because of short service).
Alternatively if the main scheme pension income is at such a level that there will be no liability to Income Tax or if taxed will only be taxed at the lower rate (20%) then AVCs may be worthwhile if tax relief at 40% is available on the contributions.
However one cannot invest AVCs if the main scheme benefits are at the Revenue maximum. So “overfunding “ is not possible. A Public Servant retiring with long service (presumably pre-1994 entrant) is unlikely to have significant scope for AVCs.

 

[Early Riser]

A Public Servant retiring with long service (presumably pre-1994 entrant) is unlikely to have significant scope for AVCs.

Except, I suppose, in a certain salary range - as you indicated in your post, where they can get tax relief on contributions at 40% and pay tax on an ARF drawdown at 20%.

Take a Class D public servant with an expected pensionable salary of €54k and aiming to continue working until full service . They have no scope to increase the tax free lump sum from the AVC fund, but with an Occupational Pension of €27k, they could draw down up to approx €8k annually at 20% from an ARF (or maybe more). This would still seem worthwhile depending on current life circumstances?

 

[allaround]

Thanks Early Riser, Conan, yes I will have a significant amount at retirement as for about 17 years I've been paying 10% of salary, based on some of your points it may now be an option for me to retire at 60 on a cost neutral basis and maximise the lump sum/additional pension, I signed up all those years ago and with hindsight it was sold on a sales basis and not advice or so it now may seem. Is anyone aware of training course on public service pension rules?,

 

[Conan]

Early Riser
A civil servant retiring on a salary of €54k with full service will get :
- a pension of €27k, plus
- a tax-free lump sum of €81k (150% of €54k)

In those circumstances there is little or no scope to invest any AVCs. The above is equivalent to Revenue maximum benefits. One can only invest AVCs if the benefits being provided under the main scheme are less than the Revenue maximum. “Overfunding” through AVCs is not allowed. So there is no scope to drawdown an additional €8k pa in your example.

 

[Early Riser]

In those circumstances there is little or no scope to invest any AVCs. The above is equivalent to Revenue maximum benefits. One can only invest AVCs if the benefits being provided under the main scheme are less than the Revenue maximum. “Overfunding” through AVCs is not allowed. So there is no scope to drawdown an additional €8k pa in your example.

I am open to correction on this, Conan, but for the moment I think I am right. The Revenue maximum is 2/3 of pensionable salary, whereas the Public Sector schemes provide for a maximum of 50%. In the above example 2/3 of €54k = €36K. Therefore, the retiree could withdraw up to €8k from the ARF - No? I am looking at these for guidance -


"To calculate how much you should invest in an AVC, you must look at the shortfall between what you will receive under the Superannuation Scheme and the maximum retirement benefits that Revenue allows. Under Revenue rules, the maximum benefit payable to an employee at normal retirement age should not exceed apension of 2/3rds of their final salary. Public Sector Superannuation Schemes pay benefits in the form of a lump sum and a pension. These Schemes pay a maximum lump sum of 1½ times pensionable salary and a maximum pension of ½ pensionable salary.

In most cases, the maximum Superannuation Scheme benefits are less than the maximum benefits permitted under
Revenue rules."(Cornmarket)

"Public servants who will have the maximum service allowable at retirement age cannot avail of PNS..............................For some who cannot avail of PNS as they will have full service at retirement they may be able to opt for an AVC to increase their retirement benefits (subject to Revenue limits)". (The Pensions Authority).

If the above are incorrect or misleading, could you give me some references re public service defined benefits schemes? Thanks.

 

[Conan]

Early Riser
No.
The Revenue limit of 2/3rds must also take into account the lump sum. So a pension of 50% plus a lump sum of 150% of Salary is equivalent to 2/3rds Pension.
For an individual with 40years service, there is unlikely to be any benefit shortfall to fund through AVCs. The only possibility might be if the individual has non-pensionable income (eg. overtime, allowances etc) which could be pensioned through AVCs.
The Cornmarket text is potentially somewhat misleading.

 

[Early Riser]

Thanks for that Conan.

In that event the Cornmarket text certainly appears misleading - and the Pensions Authority text requires clarification also.

 

[elacsaplau]

The Revenue limit of 2/3rds must also take into account the lump sum. So a pension of 50% plus a lump sum of 150% of Salary is equivalent to 2/3rds Pension.

Hi Conan,

I know, historically, that the above would be true. Is it still the case from a Revenue Maximum perspective?

- Say someone earning €80k p.a.

- Rev max (private sector!) is 2/3 of €80k = €53.33K

- Public sector scheme provides €40k pension & €120K lump sum

- Can it not be argued, from a Revenue max perspective, that the €120k lump sum is the equivalent of €3.6k pension (at an annuity rate of 3%), thereby providing scope for almost €10k additional pension?

*****

Could this be what Cornmarket means?

Isn't this more consistent with SFT calculations?

I'd appreciate any clarification!

 

[Conan]

Elacsaplau
This is not how Revenue calculate the numbers. A pension of 50% plus a lump sum of 150% is the equivalent of 2/3rds of salary. Generally a factor of 9:1 is used to convert the lump sum into pension equivalent. So €120 is equivalent to €13,333 in Pension terms. So added to €40,000 gives a total of €53,333 ( ie 2/3rds).

 

[elacsaplau]

Thanks Conan,

I get it that historically 9:1 created equivalency.

What seems strange is why the Revenue capitalise pensions using factors of 30plus for SFT purposes (which makes sense) and then use a factor of 9:1 for the reverse transaction (which makes no sense). [I am not saying that this is not the Revenue's approach, I am just saying it's illogical which...…..probably means that it is, indeed, the Revenue's approach!!]