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

[Early Riser]

If someone earns €100k a year, they’re 42, they’re a pre-2004/post-1995 entrant with an NRA of 60, and they’ll have 39 years’ service at age 60, approximately how much would it cost to purchase the missing piece via a single lump-sum?

By my reckoning it would cost €30,000. (Appendix 2, Table 6 here : http://www.cspensions.gov.ie/SuperannuationHandbookandGuidanceDec20061.pdf )

Yes, full pension and lump sum at 61 (or 60, if they had bought the year of notional service). But the Occupational Pension would be €37,000. They would have to rely on Supplementary Pension for the other €13,000 until State Pension age, and meet the eligibility criteria attached to this ( Essentially, claim any relevant SW benefit first -JB - and not be in any insurable employment).

 

[Gordon Gekko]

Thanks Early Riser. 30% of salary, pretty clear alright.

 

[OMG_OMG]

I am more confused now than when I started reading this thread

I have a question. I have a close relative who is a teacher since 1993. She is 50 now and wants to retire at 55, but did a few years subbing at the start of her career. She also has about €100K in AVCs with cornmarket. Her husband is private sector and is also 50 and wants to retire at 55. He has about €500k in AVCs. They also have investment propertywith very little mortgage left and their own mortgage is paid off too.
They asked me for advice but I realize after reading this that i am unable to give it to them and would probably be totally wrong in any advice I give them.

So a different question from me, so that I can steer them.
How much would it cost them to sit down with an independent financial advisor to lay out all of their options for them?

I have been through a similar situation this year myself.
Financial advisors are so vague and if you ask one out straight to give you a ball park figure they wont.

So having just gone and met one and got all the advice i can tell you what it cost us. We didnt want to use cornmarket, so we paid an independent financial advisor (someone who posts a lot on here recommended him actually) €400 for a sit down with both of us. He was very thorough and told us exactly what was what. He went through all accounts we have, all pensions and investments, college funds etc. Then a week later he sent us a detailed breakdown of what we need to do to achieve our goals along with some suggestions of products which we can take or not. He also outlined the fee structure of each of them in black and white.
So we are now thinking about what we went through with him and will go back to either himself or another to get everything set up.
Will probably end up costing about €1000 in fees to get all the money in the right places with no ongoing fees after that.
If we want a yearly or two yearly consult with this guy he will do it for €400 per consult.

 

[Cordel]

Hi everyone,
I'm just starting to look into this. I'm post 2004. I'm a teacher. I started in 2005. Ideally I'd like to retire early, in 20 years. So I'll have done 35 years.
What impact will this have on my pension? Looking at AVC's. Is this the right product to go for to get earlier retirement? Any advice/ links appreciated.

Corina

 

[mcguisus]

I have been through a similar situation this year myself.
Financial advisors are so vague and if you ask one out straight to give you a ball park figure they wont.

So having just gone and met one and got all the advice i can tell you what it cost us. We didnt want to use cornmarket, so we paid an independent financial advisor (someone who posts a lot on here recommended him actually) €400 for a sit down with both of us. He was very thorough and told us exactly what was what. He went through all accounts we have, all pensions and investments, college funds etc. Then a week later he sent us a detailed breakdown of what we need to do to achieve our goals along with some suggestions of products which we can take or not. He also outlined the fee structure of each of them in black and white.
So we are now thinking about what we went through with him and will go back to either himself or another to get everything set up.
Will probably end up costing about €1000 in fees to get all the money in the right places with no ongoing fees after that.
If we want a yearly or two yearly consult with this guy he will do it for €400 per consult.

Would it be possible to send me the details of that person please

 

[poorrelative]

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.

Sorry to bump this thread but, Early Riser, could you please explain the calculation for 'The maximum allowed for 19 years is 108/80'. Thanks a million.
PR

 

[muinteoir]

I have a question. How is it that I cannot buy notional service for the years that I was on career break? I understand I can't buy the now as I am on the single pension scheme but technically there was no break in service while I was on career break.

 

[muinteoir]

The one it replaced was much better. Previously, with 35 years service (or more) you could retire at age 55 (or older) with no reduction in pension. Or, with any amount of service, you could go between 60 and the normal retirement age of 65.

New starters now can't go until 65 without actuarial reduction (they can go as early as 55 but the sliding-scale reductions are very significant (even if they only go a couple of years early; eg. going just 2 years early will cost them 11.5% of ongoing pension, until death). Those in service when the scheme was introduced retain the go-at-60 option or can go as early as 55 (but, of course, with actuarial reduction).

Net, the days of public servants being able to think in terms of age 60 as the usual retirement target are gone for new starters.

The new early retirement scheme is described as "cost-neutral". So, with increasing longevity it's inevitable the actuarial reductions will get bigger over the years.

http://www.finance.gov.ie/Viewprnt.asp?DocID=2962&CatID=28&StartDate=01+January+2005 gives details of the scheme and the reductions.

This isn't just for new starters. This is for anyone with a break in service. By the time I retire I will have worked for 50 years and still won't have anything near a full pension, not even for the contributory state pension. I am by not the only one in this boat.

 

[Early Riser]

Sorry to bump this thread but, Early Riser, could you please explain the calculation for 'The maximum allowed for 19 years is 108/80'. Thanks a million.
PR

The maximum lump sum that can be taken at normal retirement age is 1.5 times pensionable remuneration - normally requiring 40 years service (40*3/2 = 120/80). Provided you have at least 20 years service Revenue will allow you to use an AVC to top up your Occupational Pension lump sum to this amount. But if you have less than 20 years pensionable service they operate a sliding scale. For 19 years service the maximum you are allowed to take tax free is 108/120. The full sliding scale is at 7.2 here: https://www.revenue.ie/en/tax-professionals/tdm/pensions/chapter-07.pdf

 

[poorrelative]

The maximum lump sum that can be taken at normal retirement age is 1.5 times pensionable remuneration - normally requiring 40 years service (40*3/2 = 120/80). Provided you have at least 20 years service Revenue will allow you to use an AVC to top up your Occupational Pension lump sum to this amount. But if you have less than 20 years pensionable service they operate a sliding scale. For 19 years service the maximum you are allowed to take tax free is 108/120. The full sliding scale is at 7.2 here: https://www.revenue.ie/en/tax-professionals/tdm/pensions/chapter-07.pdf

Brilliant, thanks a million ER

 

[Tkc2003]

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

[Written by Brendan Burgess based primarily on data provided by George O’Sullivan]

A public servant may buy years not worked or “earned ” to bring one up to full pension or close to it at normal or early retirement at age 60. This is called Notional Service Purchase {NSP}. This Key Post compares this NSP with contributing to a PRSA.

(In the public service superannuation scheme one may also buy years of pensionable service. The term “buy-back ” is usually applied to purchase of previous service, e.g. pre-marriage service,) part-time ,temporary or years for specific training ,technical or professional expertise. This facility is highly subsidised and should be a priority purchase. )

As a general rule, NSP is better value than AVCs.
It is not often worse to go for NSP, sometimes they are far better than AVCs.

It is a defined benefit {DB}scheme – this means that you will get benefits based on your final salary.
No fees or administration costs are charged
The pension you buy will rise in line with current public service salary increases.
If your salary rises due to promotion, it will be even better value.
It is guaranteed by the state. It is not dependent on stockmarket returns.
Since 2006, there is an excellent DB package for early retirement at age 60.

You can contribute to NSP at any time. Buying just before retirement usually shows the NSP to be excellent value.

Buying earlier on in your career, there are so may variables that it is difficult to say which is better.

In what circumstances should you opt for a PRSA/AVC scheme?

If you are chronically ill and do not expect to live long, you will get more benefit from the pot of money which an AVC scheme can give.
If you have used up all your NSP allowance, then contribute to a PRSA/AVC.
When you retire, you get a lump sum tax free from a NSP of up to 1.5 times your salary.
The AVC scheme is more flexible in that you can take the entire accumulated value of the AVCs on or after retirement. Some will be tax-free and the balance will be subject to income tax.
If you need them, then AVC’s /PRSA’s offer features such as extra life cover and extra spouse cover at extra cost.
You may also use AVC’s to fund for retirement earlier than age 60. If so inclined remember :
(i) as you move downwards from 60 each year becomes progressively more expensive.
(ii)buying the NSP (age 60) package in full ,with up-front cash, first is best.
(iii)you may also retire and draw your NSP pension from age 50 onwards but with actuarial reduction (as with AVC’s because your retirement is going to be longer)


The downsides of AVCs/PRSAs
Most AVC money is invested in stock market related funds which averaged 10% p.a in the 10 years to Dec. 2006. That was before charges ,which may be as low as 2% p.a. for long stay (20yrs) but as high as 6% p.a. for short stay (less than 5ys). AVC funds ,taken out late in life give poor returns because of high entry costs.

Remember, you can leave it to the last minute to buy an AVC/PRSA. or NSP.
If you were to retire on 31st December 2008 (age 65),Revenue would allow you claim tax relief of up to 40% of your yr.2008 pay plus up to 40% of your yr. 2007 pay against total pension purchases. This gives tax-free scope for buying about 2.5 yrs NSP pension or about 16 yrs. tax-free gratuity alone via AVC/PRSA. If you retired some months earlier in 2008 the 40% would reduce pro-rata.


Does it matter whether I am a Civil Servant, a teacher or a health service employee?
The schemes rules differ slightly, but the financial values are roughly the same.

Where can I get independent evaluation of these choices?
Difficult . Most independent financial advisers are not familiar with the intricacies of NSP. and government employers instruct H.R. staff not to give advice.
Civil Service Pensions website
George O’Sullivan does a Pension Optimisation lecture for groups:e-mail: georgebosullivan@eircom.net
http://www.askaboutmoney.com/forumdisplay.php?f=61

www.pensionsboard.ie ( This does not seem to mention public service pensions at all?)

Why do so many people opt for AVCs if the NSP is so good?
Because the NSP is difficult to understand and no one is promoting it. The brokers who sell you the AVCs get paid commission. They get no commission if you opt for the NSP.
The Pensions Commission saw the answers to these drawbacks in SPEARS .

Why do the trade union leaders recommend AVCs?
I don’t know. It makes no sense. Unions generally are strongly campaigning for defined benefit schemes, yet they are promoting defined contribution schemes for public servants.

 

[Tkc2003]

Hi all

Will have 27 years completed as a public servant at 65 and have purchased by periodic deduction since 2002 7.7 years by NSP giving a total of approx 34.7 years at 65. If I want to retire by 63/4 next birthday 60. Are AVCs the best tax efficient option to build up additional capital and if so where can I find an independent financial advisor for fee based pensions advice.

Many thanks in advance for any observations or pointers.

 

[Sadie007]

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

[Written by Brendan Burgess based primarily on data provided by George O’Sullivan]

A public servant may buy years not worked or “earned ” to bring one up to full pension or close to it at normal or early retirement at age 60. This is called Notional Service Purchase {NSP}. This Key Post compares this NSP with contributing to a PRSA.

(In the public service superannuation scheme one may also buy years of pensionable service. The term “buy-back ” is usually applied to purchase of previous service, e.g. pre-marriage service,) part-time ,temporary or years for specific training ,technical or professional expertise. This facility is highly subsidised and should be a priority purchase. )

As a general rule, NSP is better value than AVCs.
It is not often worse to go for NSP, sometimes they are far better than AVCs.

It is a defined benefit {DB}scheme – this means that you will get benefits based on your final salary.
No fees or administration costs are charged
The pension you buy will rise in line with current public service salary increases.
If your salary rises due to promotion, it will be even better value.
It is guaranteed by the state. It is not dependent on stockmarket returns.
Since 2006, there is an excellent DB package for early retirement at age 60.

You can contribute to NSP at any time. Buying just before retirement usually shows the NSP to be excellent value.

Buying earlier on in your career, there are so may variables that it is difficult to say which is better.

In what circumstances should you opt for a PRSA/AVC scheme?

If you are chronically ill and do not expect to live long, you will get more benefit from the pot of money which an AVC scheme can give.
If you have used up all your NSP allowance, then contribute to a PRSA/AVC.
When you retire, you get a lump sum tax free from a NSP of up to 1.5 times your salary.
The AVC scheme is more flexible in that you can take the entire accumulated value of the AVCs on or after retirement. Some will be tax-free and the balance will be subject to income tax.
If you need them, then AVC’s /PRSA’s offer features such as extra life cover and extra spouse cover at extra cost.
You may also use AVC’s to fund for retirement earlier than age 60. If so inclined remember :
(i) as you move downwards from 60 each year becomes progressively more expensive.
(ii)buying the NSP (age 60) package in full ,with up-front cash, first is best.
(iii)you may also retire and draw your NSP pension from age 50 onwards but with actuarial reduction (as with AVC’s because your retirement is going to be longer)


The downsides of AVCs/PRSAs
Most AVC money is invested in stock market related funds which averaged 10% p.a in the 10 years to Dec. 2006. That was before charges ,which may be as low as 2% p.a. for long stay (20yrs) but as high as 6% p.a. for short stay (less than 5ys). AVC funds ,taken out late in life give poor returns because of high entry costs.

Remember, you can leave it to the last minute to buy an AVC/PRSA. or NSP.
If you were to retire on 31st December 2008 (age 65),Revenue would allow you claim tax relief of up to 40% of your yr.2008 pay plus up to 40% of your yr. 2007 pay against total pension purchases. This gives tax-free scope for buying about 2.5 yrs NSP pension or about 16 yrs. tax-free gratuity alone via AVC/PRSA. If you retired some months earlier in 2008 the 40% would reduce pro-rata.


Does it matter whether I am a Civil Servant, a teacher or a health service employee?
The schemes rules differ slightly, but the financial values are roughly the same.

Where can I get independent evaluation of these choices?
Difficult . Most independent financial advisers are not familiar with the intricacies of NSP. and government employers instruct H.R. staff not to give advice.
Civil Service Pensions website
George O’Sullivan does a Pension Optimisation lecture for groups:e-mail: georgebosullivan@eircom.net
http://www.askaboutmoney.com/forumdisplay.php?f=61

www.pensionsboard.ie ( This does not seem to mention public service pensions at all?)

Why do so many people opt for AVCs if the NSP is so good?
Because the NSP is difficult to understand and no one is promoting it. The brokers who sell you the AVCs get paid commission. They get no commission if you opt for the NSP.
The Pensions Commission saw the answers to these drawbacks in SPEARS .

Why do the trade union leaders recommend AVCs?
I don’t know. It makes no sense. Unions generally are strongly campaigning for defined benefit schemes, yet they are promoting defined contribution schemes for public servants.

Hello,

I am a HSE full time clerical worker with 22 years service, due to retire at 65 in 2027, grade 5 for the past 2 years . I decided to buy back notional service and I am now in year 4 of 9 Yr buy back to reach 36 years when I retire. I am single and started work in HSE in 2002 as a permanent employee. Is this value for money as it is costing 12000 euros per year. Many thanks,

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

[Written by Brendan Burgess based primarily on data provided by George O’Sullivan]

A public servant may buy years not worked or “earned ” to bring one up to full pension or close to it at normal or early retirement at age 60. This is called Notional Service Purchase {NSP}. This Key Post compares this NSP with contributing to a PRSA.

(In the public service superannuation scheme one may also buy years of pensionable service. The term “buy-back ” is usually applied to purchase of previous service, e.g. pre-marriage service,) part-time ,temporary or years for specific training ,technical or professional expertise. This facility is highly subsidised and should be a priority purchase. )

As a general rule, NSP is better value than AVCs.
It is not often worse to go for NSP, sometimes they are far better than AVCs.

It is a defined benefit {DB}scheme – this means that you will get benefits based on your final salary.
No fees or administration costs are charged
The pension you buy will rise in line with current public service salary increases.
If your salary rises due to promotion, it will be even better value.
It is guaranteed by the state. It is not dependent on stockmarket returns.
Since 2006, there is an excellent DB package for early retirement at age 60.

You can contribute to NSP at any time. Buying just before retirement usually shows the NSP to be excellent value.

Buying earlier on in your career, there are so may variables that it is difficult to say which is better.

In what circumstances should you opt for a PRSA/AVC scheme?

If you are chronically ill and do not expect to live long, you will get more benefit from the pot of money which an AVC scheme can give.
If you have used up all your NSP allowance, then contribute to a PRSA/AVC.
When you retire, you get a lump sum tax free from a NSP of up to 1.5 times your salary.
The AVC scheme is more flexible in that you can take the entire accumulated value of the AVCs on or after retirement. Some will be tax-free and the balance will be subject to income tax.
If you need them, then AVC’s /PRSA’s offer features such as extra life cover and extra spouse cover at extra cost.
You may also use AVC’s to fund for retirement earlier than age 60. If so inclined remember :
(i) as you move downwards from 60 each year becomes progressively more expensive.
(ii)buying the NSP (age 60) package in full ,with up-front cash, first is best.
(iii)you may also retire and draw your NSP pension from age 50 onwards but with actuarial reduction (as with AVC’s because your retirement is going to be longer)


The downsides of AVCs/PRSAs
Most AVC money is invested in stock market related funds which averaged 10% p.a in the 10 years to Dec. 2006. That was before charges ,which may be as low as 2% p.a. for long stay (20yrs) but as high as 6% p.a. for short stay (less than 5ys). AVC funds ,taken out late in life give poor returns because of high entry costs.

Remember, you can leave it to the last minute to buy an AVC/PRSA. or NSP.
If you were to retire on 31st December 2008 (age 65),Revenue would allow you claim tax relief of up to 40% of your yr.2008 pay plus up to 40% of your yr. 2007 pay against total pension purchases. This gives tax-free scope for buying about 2.5 yrs NSP pension or about 16 yrs. tax-free gratuity alone via AVC/PRSA. If you retired some months earlier in 2008 the 40% would reduce pro-rata.


Does it matter whether I am a Civil Servant, a teacher or a health service employee?
The schemes rules differ slightly, but the financial values are roughly the same.

Where can I get independent evaluation of these choices?
Difficult . Most independent financial advisers are not familiar with the intricacies of NSP. and government employers instruct H.R. staff not to give advice.
Civil Service Pensions website
George O’Sullivan does a Pension Optimisation lecture for groups:e-mail: georgebosullivan@eircom.net
http://www.askaboutmoney.com/forumdisplay.php?f=61

www.pensionsboard.ie ( This does not seem to mention public service pensions at all?)

Why do so many people opt for AVCs if the NSP is so good?
Because the NSP is difficult to understand and no one is promoting it. The brokers who sell you the AVCs get paid commission. They get no commission if you opt for the NSP.
The Pensions Commission saw the answers to these drawbacks in SPEARS .

Why do the trade union leaders recommend AVCs?
I don’t know. It makes no sense. Unions generally are strongly campaigning for defined benefit schemes, yet they are promoting defined contribution schemes for public servants.

Hello, I have 22 yrs service in HSE with 4 ys left until I finish at 65, I have bought notional service (9 years which will finish when I am 65). I started as grade 4 now grade 5, is notional the best option for me? Thank you

 

[sidzer]

Hello,

I am a HSE full time clerical worker with 22 years service, due to retire at 65 in 2027, grade 5 for the past 2 years . I decided to buy back notional service and I am now in year 4 of 9 Yr buy back to reach 36 years when I retire. I am single and started work in HSE in 2002 as a permanent employee. Is this value for money as it is costing 12000 euros per year. Many thanks,

Hello, I have 22 yrs service in HSE with 4 ys left until I finish at 65, I have bought notional service (9 years which will finish when I am 65). I started as grade 4 now grade 5, is notional the best option for me? Thank you

I am not a FA and I am still trying to get my head around the whole pension thing... But 36 years should get you a fairly good pension. It is state guaranteed and there is no fees or decisions to be made about what products to invest in etc. And stock market volatility won't effect you and no hidden fees etc., - you know what you will get. The pension will be based on your promotion salary and if you get another promotion you will get a bigger pension.

I am currently in year 4 of buying back 11 years over 10 years and I am very happy with my choice. It does / is taking some time to get used to having less money but I am confident about the future and being able to have a nice standard of living in retirement should I stick it till I am 60 (currently considering going at 58 with @36 years).

The value for money thing really depends on how long you live. For me the value is in the peace of mind of knowing I will have enough money every week for the rest of my life. I can go on holidays a few times a year and pay all my bills and be generally comfortable. I might live a long time and as an investment it could be very sound or I may only live a year or 2 in retirement not get back what I put in - but I personally don't care about getting all my money back - It is about security in retirement for me.

I think the OPs article is very good and it lays out all the variable re NPS v AVCs.

Best of luck with your decision

 

[Sunnygirl69]

For a new entrant (joined 2015) who will only have approx 17 years (WTE) service at 66 years, is it possible that purchase of years could be a better choice than AVC's?

 

[ACER10]

.

 

[messyleo]

This is a really great and helpful thread.
I just want to double-check my understanding of AVCs on the model pension post 2005 scheme as it seems too good to be true. My understanding is the revenue allows a maximum tax-free lump sum of 1.5 times annual salary and half final salary for an annual payment.

The 2005 model pension scheme includes the state pension, therefore with a final annual salary of 100k with 40 years full year service, you get a lump sum of a 150k on retirement and an annual pension of 50k (approx 37k occ pension plus approx 13k of this being the contrib state pension)

Does this mean you can use AVCs to add another 13k i.e. what the state pension would be as the actual occupational pension portion of your is only 37k therefore giving you a total potential annual pension from your public service and AVC combined of up to 63k per year?

 

[Dublin85]

This is a really great and helpful thread.
I just want to double-check my understanding of AVCs on the model pension post 2005 scheme as it seems too good to be true. My understanding is the revenue allows a maximum tax-free lump sum of 1.5 times annual salary and half final salary for an annual payment.

The 2005 model pension scheme includes the state pension, therefore with a final annual salary of 100k with 40 years full year service, you get a lump sum of a 150k on retirement and an annual pension of 50k (approx 37k occ pension plus approx 13k of this being the contrib state pension)

Does this mean you can use AVCs to add another 13k i.e. what the state pension would be as the actual occupational pension portion of your is only 37k therefore giving you a total potential annual pension from your public service and AVC combined of up to 63k per year?

my understanding is that yes , you can. revenue allows you to earn up to a max of 66% of final year salary. so in your example, you could fund for up to 25k a year extra with AVC allowing you to earn 75k a year pension. I'm open to correction