Public sector pension - should I do AVC or PRSA also?

[PebbleBeach2020]

I'm a public sector employer. I will have full pension by 65. Post 95 employee.

My lump sum will be approx 140,000. Should I start doing a private Pension also?

Do I get tax relief on some or all of any private Pension contributions?

I know 200,000 is the tax free lump sum (is that a certain fixed % of pension pot or what) but I can get another 300,000 taxed at 20% also (again is this a fixed percentage of final pension pot?) Thanks!

 

[Early Riser]

I'm a public sector employer. I will have full pension by 65. Post 95 employee.

If you have full service then the maximum tax free lump sum allowed is 120/80. I assume that is where the €140,000 comes from? You cannot fund a tax free lump sum benefit beyond this.
As you are on a coordinated pension (ie, inclusive of State Pension) you can fund an AVC or PRSA-AVC and transfer the pot to an ARF at retirement. This would then be drawn down as taxable income. However, as your figures suggest that you will be paying tax at the marginal 40% tax rate in retirement you may not consider this worthwhile. Contributions to the AVC would be eligible for tax relief up the standard Revenue age band limits (inclusive of contributions to your main scheme).

 

[PebbleBeach2020]

thanks for the reply. My salary is 94k approximately. Yes, 120/80th will give me €140,000.

I was under the impression, you could get 200k lump sum from a pension. And another 300k lump sum at a tax rate of 20%. You say this is wrong? Maybe I misunderstood where I read that.

 

[Early Riser]

thanks for the reply. My salary is 94k approximately. Yes, 120/80th will give me €140,000.

I was under the impression, you could get 200k lump sum from a pension. And another 300k lump sum at a tax rate of 20%. You say this is wrong? Maybe I misunderstood where I read that.

The maximum Revenue will allow you to take tax free is 120/80, which is what you will be getting from your main scheme. If you had less than full service at retirement (say 30 years) you could use an AVC to top up to this amount.

If a public servant was on €150,000 per year and had full service at retirement, the maximum they could take tax free is €200,000, not €225,000.

If you had another pension linked to another occupation you could take up to €60,000 from it, in addition to your PS €140,000.

I understand that Defined Contribution schemes may allow more flexibility on what proportion of benefits may be taken as a lump sum (not sure about this). But there is no flexibility beyond the 120/80 in your public service defined benefit scheme.

 

[PebbleBeach2020]

So i cannot do an AVC separately and get sasy 250,000 in the pot and then withdraw 60,000 from it tax free?

I read about people with 2 million in their pension pot and taking 200k tax free and then 240k more after paying 60k in tax.

Do these people with 2 million in their pot have salaries of 1.35 million a year???

 

[Early Riser]

Well, those people are not in public service defined pension schemes. And what do you think your pension pot is worth? In addition to your lump sum it will be providing a substantial index linked annual pension for the rest of your days - maybe 30 years-ish ?

As noted, as far as I know people in defined contribution schemes can take up to 25% of the total pot tax free at drawdown. So a pot of €800,000 would suffice for the max tax-free threshold. But the rules are different for defined benefit schemes.

If you have another occupation in addition to the PS you could probably open a seperate pension for it.

 

[Conan]

So i cannot do an AVC separately and get sasy 250,000 in the pot and then withdraw 60,000 from it tax free?

I read about people with 2 million in their pension pot and taking 200k tax free and then 240k more after paying 60k in tax.

Do these people with 2 million in their pot have salaries of 1.35 million a year???

If your salary is €94k and you have full service, then you will get:
- a lump sum of c€140k plus
- guaranteed pension for life (index linked?) of c€47k with an attached Spouses Pension on your death of c€24k
In capital value terms (if this was funded in the private sector) this package has a capital value of c€1.7m (perhaps more depending on the level of post retirement increases).

 

[PebbleBeach2020]

30 years ish??? Yes it I live to 95 or older. It's that scare mongering that has public perception of the civil service so tainted. Why isn't everyone joining the public sector if everything is that rosy?

A lump sum of 140k. And let's go life expectancy for me for 15 years retired plus wife's life expectancy after I die at 80 of another four years on attached spouses pension. That's (15 x €47,000) + (4 x €23,500) = €799,000.

So total of €939,000 more realistic than €1.7 million.

 

[Conan]

30 years ish??? Yes it I live to 95 or older. It's that scare mongering that has public perception of the civil service so tainted. Why isn't everyone joining the public sector if everything is that rosy?

A lump sum of 140k. And let's go life expectancy for me for 15 years retired plus wife's life expectancy after I die at 80 of another four years on attached spouses pension. That's (15 x €47,000) + (4 x €23,500) = €799,000.

So total of €939,000 more realistic than €1.7 million.

The average life expectancy for a male retiring at 65 is now 20 years. If spouse is female (typically 3 or. 4 years younger than husband) then her average life expectancy at say age 62 is c27 years , so perhaps 5/6 years as a widow. But if you include even a modest level of post retirement indexation , the commercial annuity rate for a joint-life indexed annuity is currently c3% at best (so a multiplier of 33 times the pension). That’s the commercial cost. Indexation over a 25 years period, even at a modest level, can be significant.
Yes if your health is poor, your personal life expectancy may be lower. But I have yet to meet a potential retiree who can guarantee me when they will die.

 

[PebbleBeach2020]

i think when the media talk about the value of public sector pensions, it's safe to take 40% off the value there are talking about.

Life expectancy, most recent figures are for people born in the year 2018 and it's 84.10 for women and 80.50 for men. For people born in 1980, the expectancy wouldn't be that high. So on average i'd say my calculations above are fairly on the nose.

 

[Threadser]

When these 1.7 million public service pension pots are mentioned, the amount of the annual ps pension that comprises the state pension is rarely subtracted. This part is funded by PRSI contributions only in the private sector. 13,000 (current state pension) times 30 years is 390,000 which doesn't account for inflation.

 

[Early Riser]

Life expectancy, most recent figures are for people born in the year 2018 and it's 84.10 for women and 80.50 for men

That is life expectancy at birth. Life expectancy at 65 is different. Think on like this- what is the average life expectancy of af an 80 year old? Or of an 85 year old?

Anyway, according to the OECD the average life expectancy for an Irish male in in 2019 was 19.1 years and for a female it was 21.6 years. https://data.oecd.org/healthstat/life-expectancy-at-65.htm

I assume actuaries have their own tables for anyone purchasing a pension annuity at age 65.

None of which changes Revenue's lump sum rules for public sector defined benefit pensions.

 

[Early Riser]

When these 1.7 million public service pension pots are mentioned, the amount of the annual ps pension that comprises the state pension is rarely subtracted. This part is funded by PRSI contributions only in the private sector. 13,000 (current state pension) times 30 years is 390,000 which doesn't account for inflation.

That is a fair point for those on coordinated (Class A PRSI) schemes, including the OP here. The prospective total annual pension of €47.5K is a combination of the Occupational Pension and the State Pension. However, it is also fair to say that this pension coordination is reflected in the employee contribution rate towards those pensions.

 

[Conan]

When it comes to life expectancy for retirees, it nothing to do with life expectancy at birth. The facts are that life expectancy for a Male retiring at 65 is c20 years, and about 23 years for a female. That's the average, so some due earlier and some due later.

 

[NoRegretsCoyote]

I assume actuaries have their own tables for anyone purchasing a pension annuity at age 65.

It's probably a bit more for a typical high-earning public service retiree. These people tend to have healthy lifestyles.

But if you include even a modest level of post retirement indexation , the commercial annuity rate for a joint-life indexed annuity is currently c3% at best (so a multiplier of 33 times the pension). That’s the commercial cost.

I find these assumptions dubious. For DC pension holders I don't believe it's common to put 100% of your pension pot into an annuity. It makes sense to keep some of it in equities to take advantage of higher likely returns from equities during retirement. If you gave the OP a gift of €1.7m at retirement he almost certainly wouldn't put it 100% into an index-linked annuity. He would keep some in equities to take advantage of higher expected returns over a 20-year horizon.

So these sky-high notional values put on PS pensions aren't realistic. You're taking a feature of public sector pensions which limits the flexibility of the retiree (he can't live frugally and maintain value in an ARF with the hope of passing it on to his children for example). And instead you are placing a value on it that only a very unusual, risk-averse retiree would choose.

And before anyone says PS pensions are risk free, they are not. Payments had a special levy placed on them from 2011 which has only been unwound very recently.