Cost Neutral Retirement & Revenue

Max Power

Registered User
Messages
14
Hi all. Thanks for all the excellent information available on this forum.

I am a post 2004 public servant who is hoping to retire at 55 on CNER with 30 out of 40 years completed. My query relates to AVC's being used to make up the substantial shortfall. I know the AVC's can be used to used to cover State Pension part of integreated pension. My queries relate to the lumpsum & occupation pension parts and what revenue allow you to fund in the context of CNER.

1. I assume Revenue will allow me to use my AVC for the missing 10 years to bring my lumpsum up to the max. Will Revenue then apply CNER deduction?

2. Similar with the Occupation pension (excluding State pension part) Can I bring it up to the max using AVC's to make up for the missing years but will Revenue subject the full amount to CNER.

3. Finally with regard to overfunding of AVC's. I went through LA Brokers/Zurich about 10 years ago to set up this AVC. I'm not sure what information I gave them at the time but with promotion/pay increases etc. having taking place since I can't see how they could possibly warn me of overfunding in the future. Or is just Cornmarket as the chosen ones for most public sector schemes are obliged to warn of overfunding?

Thanks in advance. Hope it all makes sense!
 
Revenue have nothing to do with CNER. However, they have their own rules in relation to lump sum top-ups and early retirement.Taking your points individually:

1. As you have over 20 years service, Revenue would allow you to top-up the lump sum to 120/80 of pensionable salary. However, this only applies to normal retirement age. I take it that this is 65 for you, as you are post 2004. If retiring at 55 they will apply their own reduction to this max. Let's just assume your pensionable salary is €100,000. If you were retiring at 65 with 30 years service, Revenue would allow you to top your tax-free lump sum to €150,000. But if retiring at 55 the Revenue limit would be reduced as follows: 150,000*30/40 = €112,500.
Your lump sum in the main scheme for 30 years service would also be €112,500 but with CNER at 55 this would be reduced to €92,700. So Revenue would allow you an additional €19,800.

2. There is no CNER applied to your AVC pot as such. You have a number of options for your residual AVC pot at 55.

You could use the pot to buy "notional service" in your main scheme. This will give you additional pension benefits as if you had actually worked the additional years. However, these benefits will be treated the same as existing benefits in the pension scheme, ie, actuarially reduced.

A second option might be an annuity from a pension company. I don't know if you can actually buy an annuity based on age 55. In any event, I don't see any/many people going for this option given the low payout rate. I reckon anyone preferring a guaranteed pension income would go for notional service purchase.

The third option is an ARF/AMRF. This would probably be the more usual option and, provided you qualify for an ARF, you could draw down from the fund flexibly to cover the years before State Pension age. As you are currently with Zurich you can read about these on their site: https://www.zurich.ie/pensions-retirement/preparing-for-retirement/what-is-an-arf/ .

3. The risk of over-funding is much less for people on coordinated/integrated pensions - unless you are on a very high salary, eg, judges, medical consultants, etc.

Just to note : If retiring at 55 you may need to think about your PRSI record if you are aiming for the full rate State Pension.
 
@Early Riser Thank you for taking the time to provide such a detailed response.

I apologise I should have given more details about myself on point 2. I will be moving by fund from AVC into ARF at retirement.

My full pension at retirement should be around 45k however with 10 years missing/state pension subtracted & CNER this will bring it down to about 15k. Quite a drop. So I a plan to put my AVC into an ARF to try and bridge the gap. As it is a PRSA AVC I know there are revenue limits but I just need to know how much of gap I can fill? I know my AVC can cover the 13k approx State pension gap but just wondering how much of the missing years/CNER can be covered.

On the PRSI issue I imagine I will be paying same on my pension so these count as contributions?
 
I think you are asking what is the maximum amount you can accumulate in an AVC fund in the above scenario? I am afraid I cannot answer that. I do believe it is a substantial fund level - unlikey to bother the average AVC purchaser. As a very crude guide I would take the current State Pension rate and multiply by 25 (for life expectancy). I actually think the ceiling may be higher than this - but best to get advice if this is an issue for you.

On the PRSI issue I imagine I will be paying same on my pension so these count as contributions?

There is no PRSI payable on Occupational Pension income. Class PRSI at 4% is payable on any ARF drawdown but there is a minimum amount required to meet the contribution threshold. You could top up with voluntary contributions. Or if you had other insurable employment, that would do it.
 
Thanks Early Riser. I'll have a look through it. They certainly never make these things straightforward!
 
In deciding on an AVC contribution you must assume retirement at normal pension age and calculate the contribution on the basis there is a gap between your benefits at that age and the Revenue maximum. You cannot do the calculation on the assumption of early retirement. However it would be very hard to overfund if you are in an “integrated scheme” as Early Riser indicated.
 
Last edited:
The term "cost neutral" seems to indicate no cost in taking early retirement but I'm guessing that you are giving up a lot more than you would normally receive at NRA?

in this example we have 45k - 13,000 = 32,000. Deferred pension then is 3/4 of that or 24k. Then after CNER you end up with 15k. So you are giving up 9k of your pension to get 10 years of 15k. Ignoring PV of money that would be 150k. To buy 9k of pension from say 65 would cost 300k at 3% or 225k at 4%. Again this would have to be brought back to PV but still looks like bad value?

Or is there something else?
 
Last edited:
I think you are omitting the State Pension which is "integrated" for all PS employees who started since 1995. So when you take away the 13k for that 32k is the starting point. So its its 3/4 of 32k and then a 40% CNER deduction on top of that. Hense AVC's are hugely important to me.

Alternatively there is the preserved pension where I can retire at 55 and dodge the CNER bullet by starting drawing down the pension at 65.
 
The term "cost neutral" seems to indicate no cost in taking early retirement but I'm guessing that you are giving up a lot more than you would normally receive at NRA?

in this example we have 45k - 3/4(13,000) = 35,250. Then after CNER you end up with 15k. So you are giving up circa half your pension to get 10 years of 15k. Ignoring PV of money that would be 150k. To buy 15k of pension from say 65 would cost 500k at 3% or 375k at 4%. Again this would have to be brought back to PV but still looks like bad value?

Or is there something else?

That notional 45K seems ro refer to the pension he would have earned if he had continued working to 65, ie, 40 years of service. That 45K is inclusive of State Pension (or equivalent Supplementary Pension, payable only from 65). The actual Occupational Pension would be 45K-13K = 32K.

If retiring with 30 years service at 65 the corresponding figures would be about €24K for the Occupational Pension and €9.75K (3/4) for the notional State Pension amount/Supplementary equivalent.

If taking CNER at 55 with 30 years service it is this 24K that would be actuarially reduced to yield the CNER pension (the €14 or15K). At 65 the retiree could apply for the €9.75K Supplementary Pension until State Pension age.
 
in this example we have 45k - 13,000 = 32,000. Deferred pension then is 3/4 of that or 24k. Then after CNER you end up with 15k. So you are giving up 9k of your pension to get 10 years of 15k. Ignoring PV of money that would be 150k. To buy 9k of pension from say 65 would cost 300k at 3% or 225k at 4%. Again this would have to be brought back to PV but still looks like bad value?

When you look at it like that it certainly gives food for thought. Ideally if one could draw down their AVC at 55 and leave their pension until 65 it would be great but of course both are linked so its of non runner. Lots of people going to be in this position in the years to come.
 
Just on the issue of a preserved pension at 65. Does anyone know if Revenue perform the funding check when you retire at 55 or when you actually drawdown your occupational pension at 65?
 
I don't know but I would imagine it is when you drawing down the pension and AVC. If you take CNER at 55 then it would be at 55. If you leave/retire at 55 with a preserved pension, then it would be at 65. Your AVC provider has to provide details to Revenue when you are taking your AVC benefits. They (AVC provider) will first have tallied with your employer regarding your Occupational Pension benefits.
 
Back
Top