Gross Salary less twice the contributory OAP?

[CorkGuy12]

Hi all,

This new levy got me analysing my pension somewhat. I always heard it was 6.5%, but reading up about it, and doing the maths, the following is happening:

3% of my gross salary
3.5% of {gross salary - [2 x Contributory Old Age Pension*]} (effectively about 2% of gross)
10% of my gross salary (Paid by my employer)
and now ~7% of my salary with the new levy.

*=997.97 p/m (230.30 p/w)

It also now looks with the new scheme that about 22% of my gross salary is being paid into my pension. Will my employers (3rd Level Institute) contribution (10%) be reduced now that I'm paying more?

Also, what's the logic behind the Gross-2xCOAP? Why twice the COAP?

Thanks!

 

[Padraigb]

It also now looks with the new scheme that about 22% of my gross salary is being paid into my pension. Will my employers (3rd Level Institute) contribution (10%) be reduced now that I'm paying more?

No. Even 22% of your salary (almost half paid by your employer) is not enough to fund your pension.

Also, what's the logic behind the Gross-2xCOAP? Why twice the COAP?

It is a recognition that part of your pension is funded by your paying a full SW contribution (unlike public servants employed before 1995) and the Contributory OAP is part of your pension package.

 

[FMW]

I've also been wondering about the 10% employer contribution. Like you I work in a third level institution. I'm employed as a non-statutory contract emplyee. The 10% employer contribution has used as a justification why my salary is lower than the normal public scales. For example, one of my colleagues in the same situation was recently told his "salary package" was actually worth 55K because of this 10% contribution rather than just the 50K he gets. Also as non-statutory personnel, we have no security of employment. Our employment is totally dependent on the research funding we can attract. As such, we're just like private sector employees.

We do however have the benfit of the public pension which is undoubtedly good. However, it's only of true benefit if you manage to stay employed for long enough to build up the required service.

Does anyone know if this levy will apply to non-statutory contract workers within the public service ? And if so, will it apply in full ?

 

[Protocol]

Hi all,

This new levy got me analysing my pension somewhat. I always heard it was 6.5%, but reading up about it, and doing the maths, the following is happening:

3% of my gross salary
3.5% of {gross salary - [2 x Contributory Old Age Pension*]} (effectively about 2% of gross)
10% of my gross salary (Paid by my employer)
and now ~7% of my salary with the new levy.

Also, what's the logic behind the Gross-2xCOAP? Why twice the COAP?

Thanks!

Yes, pre-95 public service workers pay 6.5% of gross. That's 5% for the main pension and 1.5% for the Spouses and Children.

You must be post-95, meaning your work pension is integrated with the PRSI pension.

So you pay:

1.5% for Spouses and Children
1.5% for lump-sum
3.5% of (gross - 2*OACP)

There is a valid reason for the 2*OACP, which would take me too long to explain. But take it that's it's correct.

 

[peno]

Pension target is 50% of salary.

For each year you get 1 / 80 th of salary

1 / 2 Sal = 40 / 80 Sal after 40 years
= 40 / 80 * ( sal - 2 COAP)

= 40 / 80 SAl - COAP

= 1/2 sal less COAP but you then get your COAP from the state hence your total penion is


1/2 Salary as was the intention.

When consideration is taken for lump sum this brings total value of pension to 2/3rds salary.

 

[orka]

Also, what's the logic behind the Gross-2xCOAP? Why twice the COAP?

It's because you are targeting a total pension of 50% of final salary (FS) so your occupational pension needs to provide 50% * FS minus COAP which can also be shown as 50%* (FS - 2*COAP).

E.g. FS = 50K; COAP = 10K. You are to be provided with a 25K. The COAP provides 10K so your occ pension has to provide 15K i.e. 50% * (50K - 20K).
If FS = 80K,; COAP provides 10K so occ pension provides 50% * (80K-20K) = 30K for total of 40K pension.

 

[j26]

When consideration is taken for lump sum this brings total value of pension to 2/3rds salary.

People keep saying that, but I fail to see how it is true.

Say a person has a salary of 60,000 retires on a pension of 30,000
They get a lump sum of 90,000 - whatever way that is invested it will not create a regular return of 10,000 pa (over 11%). Assuming a reasonable 4% return on the investment, it would generate 3,600, adding 6% of final pay to the pension, meaning a total pension of 56% - well short of the 2/3 you state.

 

[oysterman]

People keep saying that, but I fail to see how it is true.

Say a person has a salary of 60,000 retires on a pension of 30,000
They get a lump sum of 90,000 - whatever way that is invested it will not create a regular return of 10,000 pa (over 11%). Assuming a reasonable 4% return on the investment, it would generate 3,600, adding 6% of final pay to the pension, meaning a total pension of 56% - well short of the 2/3 you state.

You're right - that's why Revenue allow people in that position to fund additionally through AVC/PRSA for the difference.

 

[Conan]

Oysterman,
I think you are missing the point.

• The pension - €30k is taxable
• The Tax Free Lump Sum is tax free
• If you merely put the lump sum on deposit it will not generate sufficient to bridge the €10k gap, but if you bought a single life annuity with the €90k, it would be somewhat closer (though would not fully make up the difference).

A 50% Pension + a 150% tax free lump sum is not exactly equal to a total pension value of 2/3rds. Its just that the Public Sector scheme is a mix of Pension and Tax Free Lump Sum as opposed to Private Sector Defined Benefit schemes who tend to operate whereby members surrender part of their pension for a tax free lump sum.

 

[oysterman]

Oysterman,
I think you are missing the point.

I hope not.

Sacrificing 16.67% of final salary pension for a 150% lump sum is a commutation factor of 9:1; Revenue would allow something in the region of 12:1. That's what I mean by them allowing the person to fund additionally.

 

[Conan]

Oysterman
Apologies.

I fully accept that 50% + 150% is not exactly equal to 2/3rds. So yes that presents some scope to fund AVCs.

But even in the public sector generally (even for those with potentially 40 years service), there was always scope to fund AVCs in order to provide:

• additional pension + tax free lump sum in relation to non-pensionable income (e.g. overtime, bonuses, allowances etc)
• additional spouses pension, since the Revenue max spouses pension is equal to 100% of the Members Pension (as opposed to the 50% provided under the Public Sector scheme)

As a general point, using AVCs to maximise the tax-free lump sum is clearly the most tax efficient use of such contributions. Most (I think) public sector employees will have some scope in that regard.

 

[oysterman]

But even in the public sector generally (even for those with potentially 40 years service), there was always scope to fund AVCs in order to provide:

• additional pension + tax free lump sum in relation to non-pensionable income (e.g. overtime, bonuses, allowances etc)
• additional spouses pension, since the Revenue max spouses pension is equal to 100% of the Members Pension (as opposed to the 50% provided under the Public Sector scheme)

• Not forgetting, of course, the substantial scope for funding the OACP being incorporated into the pension of public servants versus the Revenue retirement maximum of 2/3 final salary plus OACP.