New to Public Sector, Confused regarding Pension/AVCs

B

Bagman

Registered User
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Hi,

Sorry if this has been answered elsewhere but any help would be much appreciated.

There seems to be a few threads about NSPs and AVCs but I think I am at a stage where I am looking for basic directions before being able to process all that information.

I joined the public sector recently. I previously worked in the private sector for 18 years so I am starting late in the PS from a pension point of view.

I had a private PRSA I was funding with lump sum payments around this time of year. (we have some additional income outside of PAYE so have always done a yearly tax return through an accountant).

This PRSA was set up independently through a broker, ie not tied to any previous employer.

My question is can I still fund this PRSA directly even though I now work in the PS? If not, what are my options when it comes to making additional pension contributions?

Should I look to 'buy back' some years I have missed in the PS pension scheme or, if it is even possible, is it better to continue to have a seperate private pension building up?

Again, apologies if this has been answered elsewhere. More than happy to just be directed to relevant thread if so.

Many thanks.
 
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The first question to answer is whether or not you think that you need more pension on top of:

(1) State Pension
(2) pension from past private PRSA pension, DC fund
(3) public service pension
 
Hi Protocol,

Thanks for your reply and that is a fair point. I would answer as follows.

My private pension pot is not particularly big, approx 100k, I would be hoping this would grow well over the next 20 years as it is invested in a long term growth/equity fund, but equally I had planned on continuing to top it up.

The max I will be able to contribute to the PS pension scheme is 25 years service so presumably I well be well short of the maximum pension there.

Finally, I have gotten used to funding the private pension as a way of offsetting tax at this time of year. Seeing at it is an extremely tax efficient way of building a long term investment, I had planned on continuing that route.
 
You cannot fund the old PRSA from your PS earnings.
You would need to set up an AVC PRSA to make AVCs from the PS earnings.

If your other non paye income is earned income (not rental or investment income) then you could fund your old PRSA from this income.
 
Hi S class,

Thank you for that.
Do you know why that is? It seems a strange rule that I must set up a seperate AVC PRSA when I could just continue to pay into my own one, particularly as it is not linked to any particular employer.
 
It's another rule to complicate things.

It is probably there to prevent you possibly gaining extra tax free lump sum at retirement.

The amount of tax free lump sum available from your PS earnings will be limited by your PS final earnings and the number of years service.

If you invested some of your PS earnings into the old PRSA you could potentially get extra tax free lump sum beyond the allowable limit for your PS earnings. This is because you could get 25% tax free lump sum from the entire old PRSA.
 
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Thanks to you both, extremely helpful. It seems clear the AVC PRSA will have to be set up. Makes sense that it is linked to my PS employment I suppose.

Out of interest, is an AVC PRSA transferrable to a different provider at a future date? My PRSA is with Davy and I note their fees have increased a lot recently. Will probably stay with them for ease of set up at this stage seeing as it is close to tax deadline but may look to change in future if possible.
 
My question is can I still fund this PRSA directly even though I now work in the PS? If not, what are my options when it comes to making additional pension contributions?
- You would need to fund the existing PRSA from your other income
- You would need to set up a PRSA-AVC for contributions from your public sector

Should I look to 'buy back' some years I have missed in the PS pension scheme or, if it is even possible, is it better to continue to have a separate private pension building up?
- as a new entrant you're a member of the Single Public Sector Pension Scheme which is absolutely terrible compared to the older schemes. You can buy pension or lump sum (not years) but this would be pointless in my opinion. You get an annual pension from normal retirement age (currently 66) of (maximum, depending on age) 4.5% of what you pay for it. That's reduced if you retire early. There's the possibility of spouse and children benefit but otherwise it dies with you. The upshot is that if you retire at 66 and you or your spouse live for 20 years you might make a small profit. Life expectancy at birth for a woman is 83 so the life expectancy of your pension from aged 66 is 17 years so on average you'll get maybe 75% of what you pay back as a pension. If you get tax relief on the contribution at the higher rate of tax and receive the pension at the lower rate of tax you might just about break even. (google circular 15 of 2019)
-Assume inflation is nil because the Single Scheme pension is uprated in line with inflation.
-Say you spend €9000 every year buying a pension via the Single Scheme you end up after 20 years with an additional pension of a little less than €8,000 a year.
-Invest the same €9000 in an AVC with an inflation adjusted return of 4% (which would be low) and management charges of 1.5% (which would be high). Keep it invested after retirement in the same (terrible) fund. You could take a €9,000 pension from that AVC from aged 66 well into your 90s, and if you died at age 83 you'd leave the balance of around €60k to your survivors.

So forget buying service via the Single Scheme and go with an AVC. The only value of buying a pension through the Single Scheme is that it's guaranteed, but even with the terrible returns I've used above you'd be much better off with an AVC.
- just for comparison, the inflation adjusted S&P500 return for the last 30 years is about 5.5% and I'm paying a fairly high charge on my PRSA-AVC of 1.25%. If I plug those numbers into my spreadsheet, you could take a €14k annual pension from your AVC until you're into your 90s.
 
SquirrelChaser said:
My question is can I still fund this PRSA directly even though I now work in the PS? If not, what are my options when it comes to making additional pension contributions?
- You would need to fund the existing PRSA from your other income
- You would need to set up a PRSA-AVC for contributions from your public sector

Should I look to 'buy back' some years I have missed in the PS pension scheme or, if it is even possible, is it better to continue to have a separate private pension building up?
- as a new entrant you're a member of the Single Public Sector Pension Scheme which is absolutely terrible compared to the older schemes. You can buy pension or lump sum (not years) but this would be pointless in my opinion. You get an annual pension from normal retirement age (currently 66) of (maximum, depending on age) 4.5% of what you pay for it. That's reduced if you retire early. There's the possibility of spouse and children benefit but otherwise it dies with you. The upshot is that if you retire at 66 and you or your spouse live for 20 years you might make a small profit. Life expectancy at birth for a woman is 83 so the life expectancy of your pension from aged 66 is 17 years so on average you'll get maybe 75% of what you pay back as a pension. If you get tax relief on the contribution at the higher rate of tax and receive the pension at the lower rate of tax you might just about break even. (google circular 15 of 2019)
-Assume inflation is nil because the Single Scheme pension is uprated in line with inflation.
-Say you spend €9000 every year buying a pension via the Single Scheme you end up after 20 years with an additional pension of a little less than €8,000 a year.
-Invest the same €9000 in an AVC with an inflation adjusted return of 4% (which would be low) and management charges of 1.5% (which would be high). Keep it invested after retirement in the same (terrible) fund. You could take a €9,000 pension from that AVC from aged 66 well into your 90s, and if you died at age 83 you'd leave the balance of around €60k to your survivors.

So forget buying service via the Single Scheme and go with an AVC. The only value of buying a pension through the Single Scheme is that it's guaranteed, but even with the terrible returns I've used above you'd be much better off with an AVC.
- just for comparison, the inflation adjusted S&P500 return for the last 30 years is about 5.5% and I'm paying a fairly high charge on my PRSA-AVC of 1.25%. If I plug those numbers into my spreadsheet, you could take a €14k annual pension from your AVC until you're into your 90s.
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Thank you. Really helpful and much appreciated. Interestingly I am going through the process of buying back years to get a UK state pension. Price wise it is very reasonable. Had heard the single scheme 'buy back' was nowhere close to reasonable so thanks to posts here I am not going to go there. My broker has set up an AVC PRSA through Davy and has suggested the money from my initial Davy PRSA can be transferred in to this.
 
Keep your old PRSA separate.
It has nothing to do with your PS employment.
If you were to combine it with your new AVC PRSA it would be subject to the rules of your PS pension.
This could lessen the amount of tax free lump sum available to you at retirement.
Also you would only be able to take benefits from the old PRSA funds at the date of your PS retirement.
 
S class said:
Keep your old PRSA separate.
It has nothing to do with your PS employment.
If you were to combine it with your new AVC PRSA it would be subject to the rules of your PS pension.
This could lessen the amount of tax free lump sum available to you at retirement.
Also you would only be able to take benefits from the old PRSA funds at the date of your PS retirement.
Click to expand...
Thank you S class. That is good to know. Much appreciated.
 
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SquirrelChaser said:
The upshot is that if you retire at 66 and you or your spouse live for 20 years you might make a small profit. Life expectancy at birth for a woman is 83 so the life expectancy of your pension from aged 66 is 17 years so on average you'll get maybe 75% of what you pay back as a pension.
Click to expand...
Life expectancy at age 66 is greater than life expectancy at birth minus 66 because life expectancy at birth is decreased by everyone who dies between birth and age 66. That latest figures I could find for life expectancy at age 65 were from 2016 by the CSO put it at 21 years for women (unfortunately I am not allowed by the forum to link but it should be easily found on their website). So on average a 66 year old would live closer to approximately 20 years than 17 which somewhat improves the value.

A joint life expectancy calculation for a married couple would raise this more but I don't have the figures for it offhand.
 
Uh huh.

(Edit- I googled the CSO stats and at 65 it's 21 years for women and 18.3 years for men, so at the Single Scheme normal retirement age of 66- which will rise in line with the COAP age if any government commits political suicide by screwing the subset of voters most likely to show up at the polling booth- it'd be just over 18.5 years on average).

But
(a) not everyone who buys the pension via the SPS will live to retirement age
(b) not everyone is married
(c) not everyone has kids (edit- and fewer still have dependent kids at retirement)
(d) there's still an (enormous!) opportunity cost of not investing the money in products offering better returns.

The costs are actuarially calculated. Some will do better and others worse. The average person will neither win nor lose between paying for the pension via SPS and the last pension payment. Except for massive opportunity cost...

Unless you're massively risk averse (and to be fair many people are) there's much better things you can do with your cash than buy service under the single scheme.
 
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Thanks again for all the helpful replies here. I have set up an AVC PRSA and, rather than looking to pay for NSPs, I am investing spare cash in a low cost equity fund.
 
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