Civil Service - Notional Service & AVCs

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Meath22

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Hi, I’m looking for some advice on purchasing notional service and in relation to AVCs.
Age: 53
Pre 95 Civil Servant
Service: will have 32.5 years service at age of 60.
Member of spouses and children’s scheme.
Current salary: €63K - at top of salary scale
Plan to work full time from now until I’m 60 but will review after that. Can work up to 65 / preference would be 62/63.
50/50 Possibility of promotion before age of 60.

As I am short years, I am thinking of buying one years service. Initially
I was planning on paying fortnightly on basis of retirement age of 60. Now thinking of paying 2 lump sums - 6 months this year and further 6 months next year. Total lump sum cost for one year is €21k (33.3% of gross Salary) so I think 6 months should be half that. I would hope to get 40% tax back. Rate for periodic contributions up to age of 60 is 4.74%. Given the cost, is it a good idea for me to buy notional service? Is it better to pay periodically or in lump sums (I have savings to cover cost of lump sum ). I also plan to take out AVC at later date probably next year. Would I be better off starting one now and not bothering with the notional service. I find it all very confusing so would be very grateful for any comments.
 
Hi. Further to my previous entry, Just thought I’d add that buying one years service increases my lump sum by approx. €2350 and annual pension by €785 so not a whole lot (ie if my figures are correct). I am aware an AVC would only increase my lump sum. Comments much appreciated. Thanks.
 
Hi, Meath22,

Post-95 civil servant here who will also be short years at retirement age (65 in my case). My department recently had an online briefing from Irish Pensions & Finance. I'm not plugging them here but they did say they offer a free initial consultation. Obviously they may lean towards AVCs as they sell them but it would be useful to have a free-of-charge chat with them.

Have you played around with the Civil Service Pension modellers? - http://www.cspensions.gov.ie/modellers.asp. They also show the cost of purchasing notional service. It struck me as being really expensive. After some thought and some messing around with the modeller, I realised my best pension plan was promotion! Consider how you can increase your chances of promotion. Get a few competitions under your belt - open, interdepartmental,internal, whatever, and consider paying n organisation that could help you improve your chances of promotion. Its a very small investment for a huge return.

Good luck!
 
Looks expensive to me.

Buying one year gets you 1/80 x salary extra pension. So 1/80 x €63,000 = €787.50 per year additional pension. Capital value of that is debatable. I'd put it at around €20,000.

You also get 3/80 of salary in extra lump sum gratuity. So that's €2,363.

Total value you're getting back is therefore around €23,000. Not great for a cost of €21,000 invested 9 or 10 years previously. Unless you get a promotion in the meantime, as said above.

That said, unlike AVCs there's no investment risk, commissions etc. You know exactly what you're getting back for your money unless the Government change the rules of the superannuation scheme.

Personally I'd be more inclined to go with AVCs. At retirement you'll have the option of using an Approved Retirement Fund (ARF) to supplement your pension, which is a lot more flexible - vary the income, withdraw lump sums etc. ARF income is not guaranteed for life, but lots of people use ARFs to supplement their retirement income for the earlier years of their retirement while they're young enough to enjoy it, then rely on the main pension as they get older.

Watch out for charges. The firms that deal a lot with public servants - Cornmarket, IPF - are not known for offering competitive charges on AVCs. Before you commit to anything, post the proposed charges here for comment.
 
Niall56 said:
Have you played around with the Civil Service Pension modellers? - http://www.cspensions.gov.ie/modellers.asp. They also show the cost of purchasing notional service. It struck me as being really expensive.
Click to expand...

Every time that the Dept. of Finance's Purchase of Notional Service Circular has been updated and reissued it has became less and less attractive for would-be purchasers!
I was fortunate enough to have signed up under the terms of the 1979 Circular, just before the 1990 revision came into effect. So I got a good deal. The 1990 revision made things dearer but, on balance, was still attractive.
But the 2006 Circular which, as far as I know, is still in effect blew things out of the water!

So, while in my day, Notional Service was the way to go, I'd definitely opt for an AVC* rather than purchasing notional service under the 2006 Circular - unless you have no mortgage or other debts and a lump sum hanging around and earning very little interest, in which case it may be worth the investment.

* But note Dave's comment, as follows:
Dave Vanian said:
Watch out for charges. The firms that deal a lot with public servants - Cornmarket, IPF - are not known for offering competitive charges on AVCs. Before you commit to anything, post the proposed charges here for comment.
Click to expand...
 
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There are a few issues to consider here:
- investing €21k to buy 1 years notional service sounds expensive. But if you get 40% tax relief, that eases the pain. However if such (net cost) buys say an additional (tax free?) lump sum of €2,350 plus an additional pension of €785 (based on current salary, it would take 13 years of retirement to break even (ignoring any pension indexation). However you must remember that the additional pension may be taxed (either at 20% or 40% +USC). If so, that makes it much less attractive.
- buying Notional service means that you buy some lump sum and some pension. Since the addit pension will potentially be taxable, it makes this route less attractive.
- if on the other hand you went down the AVC route, you could fund just to maximise the retirement lump sum (hopefully all tax free). This is the most tax effective strategy, in that you get tax relief on the contributions but probably pay no tax on the additional lump sum.
- if you go the AVC route, any excess available after maximising the retirement lump sum, can be used to provide an additional pension income.
- if you go the AVC route, you need to carefully watch out for the costs involved and you will also need to consider the investment risk issues (what type of fund you invest in).
 
I am in a similar situation to the OP. I recently attended a retirement advice seminar run by PSRA in Maynooth. Their advice was that notional service is expensive and you have to live a long time into retirement to make it worth the investment. The most tax efficient strategy seems to be last minute AVC to maximise your lump sum to the tax free limit allowed by the revenue.
 
AVC's can be used to set up an ARF. This can be advantageous if you retire early as you can get paid S class Prsi contributions which are reconable for the contributory old age pension. Check out my previous posts on this subject if you are interested.
 
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Hi All. Thanks for all the responses which have been very helpful. Definitely gone off the idea of notional service. Quite possibly I would end up paying tax on the additional pension which would make it even worse value. I will definitely look into taking out AVC but need to consider timing as I want to pay as little costs possible. I think my Union uses Irish Life and my recollection is the terms are not great but it’s so much easier to have deductions at source. My intention would be to bring my lump sum up to its max. As a pre 95 civil servant I didn’t think I could have any excess over the tax free lump sum amount of 1.5 times my salary or that I could have an ARF. If I can, will look at starting AVC this year.
 
Meath22 said:
I think my Union uses Irish Life and my recollection is the terms are not great but it’s so much easier to have deductions at source.
Click to expand...

It is indeed more convenient to have AVCs deducted at source but I wouldn't pay through the nose for it either. The alternative is to pay gross through your bank account and then apply for your revised Tax Credits online through your Revenue account. You get your increased tax credits = pay less tax on your salary. I'm told that this takes a matter of days to get sorted and you only need to do it once at the start and then change it only if you change the contribution amount.

Meath22 said:
As a pre 95 civil servant I didn’t think I could have any excess over the tax free lump sum amount of 1.5 times my salary or that I could have an ARF.
Click to expand...

You can bring yourself up to the equivalent of 40 years' service on the lump sum and also fund for additional pension to bring yourself up to the equivalent of a 40 year pension also. When you retire, you can use the excess AVC fund after topping up your lump sum to the maximum to buy an ARF.
 
If you will only have 32 years service by retirement, then your lump sum from the Civil Service scheme will be 96/80ths of Final Salary. So you could use AVCs to fund the shortfall to 120/80ths (ie 24/80ths).
You might also check whether you have any non-pensionable earnings (eg bonuses, allowances, even overtime). Technically speaking, any income from the employment is “pensionable”, so you could also fund for 150% of such earnings as a retirement lump sum.
 
Thanks again for all the advice. Started looking at AVCs today. Maybe back at later date looking for more advice on charges/risk etc! Have already found some very useful posts on AVC’s on this forum.
 
Hi Meath22. I am a similar vintage and have the same issue re shortfall - @ 10 yrs at 60 in my case. After a lot of head swirling deliberations and some confusion I decided to go for NPS. I got independent advice from PRSA and while helpful was not directive and I was still as confused. The advisor worked out that I would need to live beyond 83 to get the benefit of the NPS investment! I got some great advice from some contributors here (THANKS GUYS).

I was attracted by the security of the investment and the peace of mind knowing that I would have a full pension at 60. I am the kind of person who likes to know what I am going to have and willing to make the sacrifices now. I liked the fact that there was no fees or glossy pie charts and graphs. It was simple enough to sign up to and get started. I have 2 years done now and 8 more to go.....

I also had dabbled a bit with AVCs before NPS. I had made 2 lump sum payments of 8k and 10k and they were valued at 26K this yr 4 yrs after starting them off (I got 40% tax refund on the 18k so the fund was doing well enough) But this could be up in smoke now due to the war in Ukraine....

Best of luck with your decisions
 
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