Should I buy years or contribute to an AVC/PRSA?

Slim

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She will be a few years short of 60. I was wondering if she could preserve her benefits but draw on the ARF for a few years without drawing her occupational pension.

I think she must draw a minimum 4% pa from her ARF.

My understanding of cost neutral early retirement is that you have 2 choices, take the reduced pension now or preserve until minimum retirement age,no in between. Is that correct?
 

Early Riser

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There are two options for early retirement - either cost neutral (also referred to as "actuarially reduced") to be drawn down immediately, or a preserved pension to be drawn down at normal (minimum) retirement age. There is no in between.

If she opts for the preserved pension I don't think she can access her PRSA AVC pot until her preserved pension age (presumably 60).

She can access the pot immediately if she opts for cost neutral early retirement. After age 60 (from year of 61st birthday specifically) she has to draw a minimum of 4% from the fund - but not before this.
 

Slim

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Thanks a million, ER, that fits in with my understanding of the schemes. However, I didn't know this
"After age 60 (from year of 61st birthday specifically) she has to draw a minimum of 4% from the fund - but not before this."

Can I clarify, even if she takes CNER from age 55, she can hold off on drawing down ARF until 60?
 

Early Riser

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Can I clarify, even if she takes CNER from age 55, she can hold off on drawing down ARF until 60?
Yes, she can hold off from drawing down anything from the ARF until 60. But she must transfer the money from the AVC to the ARF when she is retiring (if opting for the ARF route). She can use some of the money from the AVC fund to top up her tax-free lump sum to revenue limits at retirement (or, indeed, all of it if revenue limits allow) - this is the most advantageous from a tax point of view. The remainder of the fund is then transferred to the ARF.
 

Slim

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Many thanks, Early Riser, that is very useful information. I have written to her prsa provider to seek guidance on the process. Thanks again. Slim
 

sidzer

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Hi all,

I am currently looking at buying notional service as I will be 10 years short at 60.

I got some figures from HR and then asked them if those costs are from gross or net pay and the text below was their response!


Re Periodic Contributions: Salaries Section would deduct 0.35% of gross WTE salary and 2.60% of Nett WTE salary (ie Gross less 2 x Annual OACP Rates) per fortnight for each year to be purchased from next Birthday until retirement on reaching your 60th Birthday.


The Lump Sum calculation is based on % of Gross Salary.

while it shows me how the costs are calculated to buy back years it doesn't really answer my question!

Is it that the .35% payment is from gross and is therefore taken before tax is applied and then after tax a futher 2.60% is taken off from the net? This would mean that you are not getting tax relief on the largest portion of the payment.

Any help would be much appreciated.

Thanks - Sidzer

 

Slim

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[QUSide.idzer, post: 1635637, member: 26145"]
Hi all,

I am currently looking at buying notional service as I will be 10 years short at 60.

I got some figures from HR and then asked them if those costs are from gross or net pay and the text below was their response!


Re Periodic Contributions: Salaries Section would deduct 0.35% of gross WTE salary and 2.60% of Nett WTE salary (ie Gross less 2 x Annual OACP Rates) per fortnight for each year to be purchased from next Birthday until retirement on reaching your 60th Birthday.


The Lump Sum calculation is based on % of Gross Salary.

while it shows me how the costs are calculated to buy back years it doesn't really answer my question!

Is it that the .35% payment is from gross and is therefore taken before tax is applied and then after tax a futher 2.60% is taken off from the net? This would mean that you are not getting tax relief on the largest portion of the payment.

Any help would be much appreciated.

Thanks - Sidzer


[/QUOTE]
Hi Sidzer. The 'nett' in question does not refer to after tax but after deduction of 2xOACP. So annual salary less c.€36k x 2.6%.
 

keepon

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I'm due to retire in 5 years time and looking to up my public service pension, which is based on just under 19 years. (In line with general trends, my previous, substantial, private sector defined benefit pension scheme was scrapped, cash taken out to the company by new buyers, and now I am left with a puny AVC).

I have been diligently reading (again) this very valuable but rather dense thread, and it seems now that the tide of opinion has turned against buying notional service. Is that a reasonable conclusion?

Should I just go with what the brokers seem to be saying and take the AVC route? It's difficult to get objective advice. My employer says to consult a financial adviser. My financial adviser is most likely on commission... and, as observed early in this thread, there are few who seem to understand the complexity of public service pensions.
 

Early Riser

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I have been diligently reading (again) this very valuable but rather dense thread, and it seems now that the tide of opinion has turned against buying notional service. Is that a reasonable conclusion?

Should I just go with what the brokers seem to be saying and take the AVC route?
I do not know about actuarial comparisons, but otherwise there are disadvantages and advantages to both routes. So, to some extent, it depends on your priorities.

With notional service you know exactly what benefit you will get as a proportion of your pensionable salary, the benefit is guaranteed for life and there is an index link (partial, at least) to salary. And all your pension purchase goes towards pension - there are no fees or charges. The value of notional years increases the longer you live (or your spouse lives) into retirement.

With AVCs you have more control over your pension pot. This may be attractive for you as you will have only 24 years service at reirement, so your lump sum from the main scheme will be 72/80 of pensionable salary. You could use your AVC fund to top this up with another 48/80 of pensionable salary tax free. Any remainder can be transferred into an ARF and drawn down as income at a rate that suits you. However, there will be fees and charges attached to an AVC (and to a subsequent ARF).

They are not necessarily mutually exclusive. It would theoretically be possible to fund an AVC only up to the approximate level of the tax free lump top up at retirement while also contributing to notional years. It depends on how much you have available to contribute between now and retirement. (The lump sum top up is undoubtedly good value).

If you haven't come across it yet it might be useful to have a look at this Guide from the Pensions Authority : https://www.pensionsauthority.ie/en/Employers/Pension_guides/Purchase_of_notional_service_and_AVCs.pdf .
 

keepon

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Thanks for that ER. It clarifies things considerably!

I'll actually have only 19 years service at retirement -- this includes buying back temp service of 5 years out of my lump sum. Can I ask how you arrive at the 72/80 calculation so that I can apply it to 19 rather than 24?

My separate AVC is currently at €120,000. I looked at transferring it across, but the cost/penalties were prohibitive.
 

Early Riser

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I'll actually have only 19 years service at retirement -- this includes buying back temp service of 5 years out of my lump sum. Can I ask how you arrive at the 72/80 calculation so that I can apply it to 19 rather than 24?
Sorry, I misread - I thought you had 19 years served and 5 to go.

Anyway, the lump sum is calculated as 3/80 of pensionable remuneration for each year of service. So for 19 years you should get a lump sum of 57/80 of pensionable remuneration from your main scheme. However, if you have just 19 years of pensionable service it complicates matters somewhat. Under Revenue rules you need at least 20 years service to be able to top up the lump sum to 120/80 from an AVC. The maximum allowed for 19 years is 108/80. So, as things stand, you could use an AVC to add 51/80 to your tax free lump sum.

However, if you were to buy back at least one year through "Notional Service" I assume you would then qualify for the full 120/80. Assuming you had 20 years service (19 actual and 1 "notional") you would get 60/80 from the main scheme and could top up by another 60/80 from an AVC. I am actually not certain that notional service counts for this purpose but I assume that it does.

Edit: I deleted the calculation for pension purchase annual benefit as it was incorrect. Each year of notional service would yield 1/200 of pensionable remuneration below 3.33333 times State Pension (currently approx €43,000), plus 1/80 of that portion of pensionable income which exceeds this threshold.
 
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keepon

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Brilliant. Thanks again. Lots to chew over there. We had been warned off notional service because of its cost, but it looks like it might have a role here.
 
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