4. Does it make sense for me to invest more in my pension as a Single Scheme Member?
As a Single Scheme member, unless you are a consultant doctor or a similarly highly paid public servant (e.g. 150k+), or have a very large pre-existing pension, in 99.9% of cases the pension you receive from the Single Scheme when you retire will be
much smaller than the maximum pension size revenue allows you to have.
This is mainly because:
- The pension benefits you bank under the Single Scheme are calculated based on your salary at the time you make your contributions;
- Your salary will increase over the course of your career;
- Revenue’s maximum pension limits for your salary levels are based on your final salary when you retire.
You can invest more money in your pension to make up for this shortfall, and this can make a lot of financial sense. Generally, pensions are a great way to invest long term because they grow without being taxed along the way (allowing them to compound more effectively), you get tax relief on the way in (this is like a loan from revenue you can earn money on) and you may pay less tax in retirement than you will when you’re working.
However, when considering whether you should invest more in your pension, you need to consider this decision in light of your broader financial circumstances and objectives.
Generally speaking, in Ireland, your financial priorities should be to:
- Eliminate any costly debt (2.5%+);
- Purchase a home / save for a deposit, so that you are no longer paying exorbitant costs to rent property;
- Have enough money to meet all your short-term and most of your medium-term financial needs, including utilities, family expenses and education costs, childcare, etc…
You may also wish to:
- Invest in your education, so that you can increase your prospects of getting a better job and attaining a higher salary, promotions etc.
- Travel if you’re a young person, before you settle down and find a partner etc…
It only make sense to consider long-term “investments” in Ireland, like investing in your pension, when factors like those described above are
not present.
If you’ve considered all of the above and
still think it’s a good idea to do some long-term investing, you’ll also want to consider other possible options.
For example, if you own a home, it may make sense to take the money you might have invested in a pension to pay off your mortgage early instead. See related discussed thread
https://www.askaboutmoney.com/threa...ibute-to-pension-or-do-something-else.221401/ . It may also be economically beneficial to make your home more energy efficient.
Generally speaking, in Ireland it doesn’t make sense to invest in ETFs, life-insurance investment products etc… until your pension contributions have been maxed out and your mortgage has been paid off. Do not invest in Crypto, Gold, individual stocks, individual bonds etc… unless you love losing money and filing tax returns for your trouble.
The key thing to remember is that, if you invest more in your pension, you can’t access that money until you retire. You really need to think about whether you might need that money for something else in the meantime.
If investing in your pension does make sense, then the best option for Single Scheme Members is to set up an AVC. However, before we move on to AVCs we need to explore pension shortfalls a bit more.
5. Pension Shortfalls
Your
Pension Shortfall is:
[The maximum pension benefits for your salary level under revenue tax rules].
minus
[The
capitalised value of the pension benefits you would accumulate under the Single Scheme if you began your career at your current salary and worked to age 66]
plus
[The value of the benefits you have accumulated under the Single Scheme to date]
The capitalised value of a pension just means how much an actuary would say it’s worth for you to get paid “
x amount of money per year” till you croak in the form of a lump sum.
Working this figure out precisely is unnecessary for most people but I’ll illustrate below.
As a starting point, the following table illustrates the maximum value someone’s pension can be under revenue rules for different genders, marital statuses and at different salary levels as a member of the Single Scheme:
| Gross Salary | Female with no spouse or civil partner | Female with spouse or civil partner | Male with no spouse or civil partner | Male with spouse or civil partner |
| 25,000 | 381150 | 414150 | 323400 | 455400 |
| 50,000 | 762300 | 828300 | 646800 | 910800 |
| 75,000 | 1143450 | 1242450 | 970200 | 1366200 |
| 100,000 | 1524600 | 1656600 | 1293600 | 1821600 |
| 125,000 | 1905750 | 2070750 | 1617000 | 2150000*** |
To get a
rough idea of the
capitalised value of the pension benefits you would accumulate under the Single Scheme if you began your career at your current salary and worked to age 66:
(Current Salary / 2) – 14500 = X
X * 0.025 = Y
Y * (Years since you became a member of the Single Scheme) = Z
Z * 25 = Capitalised value of Referable Pension
Lump Sum Value = Current Salary * 0.0375 * Years Worked in Scheme
Capitalised Value = Capitalised value of referable Pension + Lump Sum Value
To get a
rough idea of the value of the benefits you have accumulated under the Single Scheme to date get your latest pension benefit statement received from your employer and multiply the accumulated referable pension by 25 and add the accumulated lump sum to the total.
Let’s say Jimmy just joined the public service, has twenty years to go until he can retire at his normal retirement age (66) and is paid a static 75,000 for the duration of his career:
75,000 / 2 – 14500 = 23000
23000 * 0.025 = 575
575 * 20 = 11500
11500 * 25 = 287500
75000 * 0.0375 * 20 = 56250
287500+56250 = €343750
Jimmy isn’t married so his pension shortfall is 970200 – 343750 = €626,450. His pension shortfall would increase by about €400,000 if he got married.
The other point to note here is that in reality Jimmy’s salary would not stay static over the twenty years but would increase significantly with increments, promotions and general public service pay increases.
Let’s say Jimmy started getting paid 75,000 a year and ended up getting paid 125,000 at the end of the twenty-year period. Good for Jimmy. His maximum pension at that point would be 1,617,000 if he’s single and 2,150,000 if he’s married (the absolute revenue max).
Mathematics and jargon aside, the overall point here is that, generally speaking, there is a very large scope to invest further in your pension as a single scheme member. You have to be a little bit cautious when you’ve been investing for a very long time but there’s a large cushion, especially so if you’re married.
6. Additional voluntary Contributions
Setting up an AVC is a way to invest more money in your pension. When you set up an AVC you make payments to a
separate pension pot you can access when (and only when) you retire. This pension pot is invested in various funds that you choose and the money invested grows over time. You get tax relief on contributions to your AVC just like your normal pension contributions to the Single Scheme.
The maximum amount of money that you can invest in an AVC is equivalent to your pension shortfall, discussed above.
While there are different options for making AVCs, as a Single Scheme Member, the best way of doing so at present is via a provider known as Cornmarket. The two main reasons for this are because:
- As a public servant, FORSA have negotiated a deal with Cornmarket where you will pay much less fees for your AVC compared to other providers. You don’t need to be a union member to get these rates – you only need to be an employee of a public sector body signed up to the Forsa AVC / Equivalent AVC Scheme.
- For the detail on this, Cornmarket offer a “tiered” AMC system with the following rates: 1% AMC on first €40,000 in the AVC; 0.75% on the next €100,000 in the AVC; 0.5% on funds thereafter. There is no fee on money on the way in. This is generally the best deal you can get on the market, assuming your AVC will be more than modest.
- If you’re only planning on making a small AVC or a once off AVC this probably isn’t the thread for you. https://www.prsa.ie might be a better option – it can get you a 0.75% AMC off the bat.
- Cornmarket has salary-deduction arrangements in place with public service bodies. This means your AVC can come out of your payslip and all tax issues are addressed without any further thinking on your part. You don’t need to worry about admin, filing tax returns with revenue etc….. This convenience has a lot of value and means you can just forget about your pension and pay into it. There’s also a cash flow benefit to this – more of your money can be invested at any given time.
Cornmarket has default funds it tries to put public servants on when you take advice from them. These are the “cautious”, “balanced” and “adventurous” funds. The returns on these funds is not great and you’ll probably only end up with a small AVC if you invest in them, compared to what you could have gotten had you done a bit more looking around.
What Cornmarket don’t advertise well is that you have access to all of the Irish Life Funds when you set up an AVC with them as a public servant. Cornmarket has a “self-directed” option you can use to invest in these funds on their website. You fill out the form, put down whatever Irish Life funds you want, select what % of your salary you want to pay in the AVC each month and free post it to them. There’s a €100 fee to do this which comes out of your payslip.
Please note that if you
overfund your AVC bad things will happen. You can overfund your AVC by (i) contributing more to your pension each year than you’re allowed to for your age, (ii) exceeding the revenue maximum pension size for your salary level or (iii) exceeding the total maximum value for all possible pension schemes (€2.15 million). Don’t overfund your AVC. This is generally something single scheme members don’t have to worry about unless you’re been a diligent investor for a long time. You will also need to work in the public service for at least ten years to be entitled to avail of the revenue max pension limits for your salary level (I
think -
if someone could confirm this would appreciate).
The revenue % limits on the amount you can contribute to your pension
each year based on your age are below. ASC does not count towards these limits.
| Age | % limit of Gross Salary |
| Under 30 | 15% |
| 30-39 | 20% |
| 40-49 | 25% |
| 50-54 | 30% |
| 55-59 | 35% |
| 60 or over | 40% |
If you have pension benefits from a previous employment these need to be considered so your pension doesn’t breach the 2.15 million revenue max threshold on pension benefits.
Please note that
your capital is at risk when you invest in an AVC. If you take a sensible investment approach it’s very likely you’ll end up with a lot more money than what you started with but don’t disregard this possibility. If you’re worried about this read more about investing in general and try to learn about the differences between risks, volatility, different kinds of funds and asset classes etc…
7. AVC strategy recommendations (Read this if TLDR)
Based on all of the information above, I’d make five simple recommendations for Single Scheme Members thinking about AVCs. The recommendations assume:
- You have assessed you’re in a position to make long-term investments and investing in your pension is a good long-term investment option compared to the other options you have available
- You are neither a consultant doctor nor some other similarly extremely highly paid public servant;
- You do not already have significant pension benefits from previous employment;
Please note these recommendations are not aimed towards people with unique / awkward financial circumstances or personal situations.
Recommendation 1
If you’re a Single Scheme Member with more than twenty years before you plan to retire, you should set up an AVC and invest 100% in a
global, passive equity index fund.
Two Irish life funds available through Cornmarket that would fit the bill include the Index Global Equity Fund and the Indexed World Equities Fund.
Contributing 10% of your salary will set you up for a large AVC when you retire (remember you get tax relief on this). A bit more if you’re closer to retirement or a bit less works too. You should set up your AVC and forget about it / leave it alone.
With 10% contributions for thirty years, you could end up with AVC pots of the following sizes at the following salary levels, assuming a 2% salary growth rate each year:
| Gross Salary | Pessimistic (6% growth) | Moderate (8% growth) | Optimistic (10% growth) |
| 25,000 | 252600 | 362100 | 430600 |
| 50,000 | 505200 | 724200 | 1063900 |
| 75,000 | 757800 | 1086200 | 1595900 |
| 100,000 | 1010400 | 1448300 | 2127900 |
| 125,000 | 1263000 | 1810400 | 2659900 |
Yes – by quietly investing a small proportion of your salary for a very long time you can make
humongous amounts of money. Bear in mind inflation will affect the true value of your investment much further down the line.
You’ll see projections from this approach manage to break the revenue limits for your
current salary in the moderate and optimistic scenarios. However, in my view it’s always good to invest aggressively as a Single Scheme member because:
- Your salary will rise a a lot from its current level in practice;
- The limit that you can invest in your pension will increase as a result;
- You can always adjust how much you contribute along the way;
- The tax relief on contributions you receive at the moment might not be so good in the future, and
- The revenue pension limits will (hopefully?) rise over time due to inflation.
Effectively, this strategy involves "pre-funding" your AVC to ensure your pension grows to fill the funding gaps created by future increases to your salary. As your salary expands and your revenue limits increase, your AVC will grow along with them and you make the most out of long-term compound interest.
Once you’re ten to fifteen years off retirement get financial advice. Depending on your financial circumstances, it may make sense to continue investing in equities or a mix of equities and bonds. You may also want to up or reduce the amount you’re investing.
Recommendation 2
If you are a Single Scheme member who:
- Will retire within the next twenty to fifteen years or less but who has not invested in an AVC to date, or
- Will retire within the next twenty to fifteen years or less but only has a modest AVC,
You should set up a self-directed AVC allocated 70% in a global, passive equity index fund and 30% in a global, passive bond fund (with bonds of around five years or less). Adjust the equities to 60% if you're less comfortable with risk or much closer to retirement. While making sure to stay within the revenue age limits, you can realistically ram as much money as you like into your AVC before you retire and there’s very little risk you’ll breach the revenue limits for your salary level. Get financial advice when you’re five years out from retirement.
Recommendation 3
If you’re a Single Scheme Member that’s planning on retiring early, you should ram as much money into your AVC as early as possible based on revenue yearly limits. Invest 70 / 30 in passive global equity and bonds funds (five years or less in the bonds).
Recommendation 4
If you're doing a very late AVC (e.g. 5 years out from retirement) and haven't invested to date - look elsewhere on the forum for advice about the best approach to maximising your benefits before you retire.
Recommendation 5
Do not begin investing / stop investing in an AVC if the contributions you make only receive 20% tax relief and you’re fairly sure you’ll pay a 40% tax on your pension in retirement
unless you still have 20+ years to retire
or you’re only doing so to top up your tax free lump sum.
Do not invest in an AVC if your contributions only receive 20% tax relief and you have a mortgage to pay off.
