Calculating DB pension value and chargeable excess tax.

[January25]

A public sector relation is planning to retire in 2029. They have read that a factor of 32 applies at age 57. Is this correct ? The PFT is 2800000 in 2029.
If annual pension x 32 + lump sum is 3000000, how is the excess worked. Is the factor correct ? Is it 41% tax immediately ? On the 200k ?
Is there anyway to avoid CET ?
They have heard that it can be spread over 20 years, but this will reduce the annual pension.
Any advice or idea what can be done.

 

[AAAContributor]

a factor of 32 applies at age 57. Is this correct ?

Yes, but!

To capitalise DB pension benefits against the Standard Fund Threshold (i.e., the SFT, currently €2.2m, increasing to €2.8m by 2029 and earnings growth thereafter), the Table of factors in Chapter 25 of the Revenue Pensions Manual is used.

A factor of 32 applies if accessing pension benefits at age 57. As you can see from the Table, the factors reduce as the retirement age increases (i.e. factor of 26 at age 65).

However, it is important to note that the amount of pension accrued as at 1 January 2014 is capitalised at a factor of 20. Only the balance would be capitalised at 32 (in this example). Prior to this date, pension benefits were capitalised at 20 according to the tax legislation. In this example, a portion of the pension would be capitalised at 20 and a portion at 32.

Also, if retiring at age 57 and Cost Neutral Early Retirement (CNER) is being availed of, the annual pension and pension lump sum will be subject to an actuarial haircut. That could reduce the capital value, if your relation's calculations have not factored this in.

In addition, if the particular grade of public sector employment is eligible for Professional Added Years, this additional service is added to service accrued as at 1 January 2014 for calculation of the capital value of pension benefits as at 1 January 2014 and is capitalised at the 20x factor.

Is there anyway to avoid CET ?

The 'Loan Option' that spreads the Chargeable Excess Tax (CET) charge over 20 years is one option. This can be very beneficial; it amounts to an interest free loan; it is paid from pre-tax earnings, and in the event of death, the liability is discharged. Any pension payable to a spouse will not be impacted by the CET liability as it will be extinguished.

If the lump sum from the Public Sector Scheme is in excess of €200,000, with any portion above €200,000 subject to 20% tax, any tax payable at 20% on the lump sum can be used as a tax credit against any CET liability.

If there are any AVCs or personal pensions, the 'Encashment Option' could be used in order to remove the value of these from the calculation of the capital value of the total pension benefits. However, income tax at 40% plus a flat rate of USC of 2% would be due on the encashment.

Is it 41% tax

The rate that CET is charged at is 40%.

 

[January25]

Very comprehensive reply thank you.
Yes he did work from mid 1996 and the projected retirement date is same date in mid 2029.
There were two years career break making a total of 33 years minus 2 ~ 31 years service.

The two years might be eligible for professional added years but not sure if he is eligible due to CNER ?
So is factor x 20 will used for the first 16 years and then the higher factor or is it for 16 used for the entirety ?

 

[Saturn]

The two years might be eligible for professional added years but not sure if he is eligible due to CNER ?

Whether or not he may be eligible for professional added years depends on the specific qualifications and/or experience required for appointment to his post (plus other criteria). Qualifying for it is not related to the career break. However, in the event he is technically qualified for professional added years, there would be a reduction related to both the early retirement and to the career break. In effect the reduction might be the full amount of any award.

 

[AAAContributor]

The two years might be eligible for professional added years but not sure if he is eligible due to CNER ?

As @Saturn mentioned, Professional Added Years (PAYs) is relevant to the specific qualifications and/or experience required for the post; the career break wouldn't be relevant.

I should state that if someone retires before age 60, no PAYs will apply (to the best of my knowledge).

PAYs only comes into play with retirement ages above 60. I mentioned it for the sake of completeness in case your relation continues on to 60 or beyond. Being able to avail of PAYs could really affect the benefits available and cause someone to stay on to access them, assuming they're relevant to the particular post of course.

 

[AAAContributor]

So is factor x 20 will used for the first 16 years and then the higher factor or is it for 16 used for the entirety ?

The starting point is that your relation will need to ascertain their service and earnings as at 1 January 2014 to calculate their accrued pension as at that date.

Their accrued pension as at that date will be (very approximately): ( Earnings less €24,000* ) x 16 x 1/80. Let's call the result: X

They then calculate the pension based on their final salary and total service (31 years) adjusted for any CNER haircut. Let's call the result: Y

Capital Value Calculation:

X multiplied by 20 factor = A
(Y - X) multiplied by 32 factor = B
Lump Sum (CNER haircut applied) = C
AVCs = D

Capital Value = A + B + C + D

* €24k = approx. 2x Contributory State Pension as at 1 Jan 2014

 

[January25]

Can you clarify what are ‘accrued pension/ earnings’ at that point in 2014 ? Are they the sum total of 8 years salary from 1996-2014 inclusive ? Or are they his projected annual pension x 8.

 

[AAAContributor]

Are they the sum total of 8 years salary from 1996-2014 inclusive ? Or are they his projected annual pension x 8.

No.

Their accrued pension as at that date will be (very approximately): ( Earnings less €24,000* ) x 16 x 1/80. Let's call the result: X

'Earnings' in the above formula would be their pensionable remuneration as at 01 January 2014 (i.e. basic salary plus pensionable allowances). 16 refers to the pensionable service accumulated as at 01 January 2014.

 

[Steven Barrett]

If they retire early, they are not eligible for professional years. They must work to the normal retirement age, which is probably 60 in their case.

For public servants, there is not much they can do to avoid this tax. Thanks to the judges of Ireland, public servants do have the option of paying the tax over 20 years in what is in effect and interest only loan by having a reduced pension. It is much better to use this option rather than paying it up front.

they could claim their pension at a later age and use a lower computation number, thereby reducing the value of their pension. Their pension will be revalued each year though, so there is no guarantee that the overall value will be reduced.

This is a common problem with hospital consultants since the high court settlement on their salary increases saw a significant pay increase and then incremental increases thereafter.