Lump sum benefits tax free Revenue calculation

podgerodge

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The Revenue Pensions Manual, outlines, for example, if someone takes Cost Neutral Early Retirement, Revenue reduce the maximum lump sum allowable tax free e.g. in an example online:

Public Servant on 60k with full 40 years at age 60, would get 90k lump sum. If only aged 53, and retired with 30 years service -

90k x 30 years / 37 potential years service = 72972 reduced tax free lump sum.

Here is the relevant Revenue rule:

9.4. Lump sum benefits In cases other than paragraph 9.2 above, the maximum immediate benefit is the greater of (a) 3/80ths of final remuneration for each year of actual service or (b) N x LS NS where N = number of actual years of service (as in paragraph 9.3 above) LS = the maximum lump sum receivable had the employee served until NRA less retained benefits and may take into account the increased benefits detailed in Chapter 7.2 NS = number of years of total potential service to NRA had service continued until then (also as in paragraph 9.3).


My question - Is "N" or "NS" a whole number in all cases, or does leaving, using above example, at age 53.5 (so 36.5 NS), result in 73,972 as opposed to 72,972. Or, alternatively, if leaving with 30.5 years service rather than 30, still at age 53, result in 74,189.

Hope that makes sense!
Thanks.
 

Early Riser

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As far as I know, service (NS or N) is actual duration in years and days, ie, leaving at 53.5 years with 30 years service would give an NS of 36.5 (assuming "normal retirement age" is 60).
 

podgerodge

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Thanks early riser. Was thinking that, but the revenue manual could be more explicit!

By the way, something we discussed a long time back, and not sure if i reported it here, about whether supplementary pension would be affected by CNER - I wrote to the Pensions Customer Service Unit of Dept. of Education as I saw a document they produced in August 2020 entitled: “Supplementary Pension Information Note”. I asked them the question explicitly and here is their response:

My email: "My question, which I cannot find an answer for anywhere, is whether if a staff member goes for CNER, say at 55, when they get their supplemental pension at age 60, is there any actuarial reduction (as opposed to no. of years’ service) applied to the supplemental pension, or is that paid in full (prorated for number of years service)."

Response from pensions unit:

"The Supplementary element for CNER retirees is payable:
  • at age 60 for old entrants
  • at age 65 for new entrants.
There are no reductions on the supplementary element of the pension once it becomes payable at either age 60(old entrant) or 65 (new entrant) ."
 

Oisin19

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Leaving employment early and accessing pension benefits early are two separate things. Revenue pension manual generally deals with maximum benefits that can be paid. The rules of each particular scheme could be different.

CNER is an actuarial reduction of the pension due at NRA, to commence payment early. There is specific factors for calculating the reduction. From memory in public service, I believe the lump sum reduction is circa 2% per annum but the annual pension is 6% per annum.

If you leave public service early you will have a deferred pension and lump sum payable in the future. To get it early then you apply the factors to that amount.

Assuming you are accruing lump sum at 3/80, if you complete 30 years you would be entitled to 67,500 (ignoring inflation) at age 60. If you want to get it at 53 you would have to apply the appropriate factor then to that amount.

I am not sure if CNER is good value for money but I guess if you had AVCs this could offset the reductions.
 

podgerodge

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Yes, agreed. The question I was referring to though was whether CNER would affect the supplemental pension when reaching 60. Seemingly there have been different interpretations of this. So it seems the correct answer is that supplemental is not affected by CNER actuarial reductions (but would of course be affected by reduction in service).
 

podgerodge

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HI Early Riser, where is your 83,250 from? Are we still talking about 53 yr old with 30 years service on 60k? Should it not be 90k*30/37 = 72,972 as the Revenue allowance, leaving 14,112 as the shortfall for AVC?
 

Early Riser

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Are we still talking about 53 yr old with 30 years service on 60k? Should it not be 90k*30/37 = 72,972 as the Revenue allowance, leaving 14,112 as the shortfall for AVC?
Sorry, podgerodge. I think you are right on that. I will delete the above to avoid confusion.
 

NoRegretsCoyote

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My question - Is "N" or "NS" a whole number in all cases, or does leaving, using above example, at age 53.5 (so 36.5 NS), result in 73,972 as opposed to 72,972.
Statements of public service entitlements are given in years and days so highly unlikely to be an integer.

Revenue would presumably use the same number as is being used for your pension calculations.
 

podgerodge

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Thanks all. Couple more questions - if the lump sum shortfall is higher than the max contribution e.g. 30% for age 50, does one have to contribute to an AVC a year prior to retirement to put, say, half the investment in, so that they can cover the rest in the year prior to retirement - and can you then claim back for the last 2 years, or claim all of the AVC investment against tax for just the previous year (if you've paid enough tax).

Second question - I have seen online (cornmarket) tables showing that, if 50, you can contribute 30% - but then go on to say that if you are "non contributory" and member of spouses and childrens, this is cut to 28.5%, not a member of s&c then 30%, and if "contributory", it's cut to 23.5%/25%.

I'm confused by this - can I contribute 30% in this example, or only contribute the lower %'s?
 

Protocol

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Most PS contribute 6.5%, made up of 5% main scheme +1.5% S&C.

A minority of PS, mainly civil servants, contribute 1.5%, as their main scheme is non-contributory.
 

Early Riser

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A minority of PS, mainly civil servants, contribute 1.5%, as their main scheme is non-contributory.
I think all PSs who are on Class D/B PRSI (most, but not all, pre-1995 entrants) are in a non-contributory scheme - apart from the 1.5% for the S&C.
Post 1995 entrants (Class A PRSI) are in a contributory scheme. It is 1.5% of gross remuneration plus 3.5% of net remuneration (gross remuneration minus twice the current annual rate of state pension - €26,000. They also pay 1.5% for the S&C.

I'm confused by this - can I contribute 30% in this example, or only contribute the lower %'s?

The Revenue limits are inclusive of the above contributions, ie, you need to deduct whichever of the above you are currently paying from the 30%. I assume you are in the S&C, as most are.
I think you can pay up to two years worth of AVCs in your final year. You can pay up the limit for your previous year's employment and claim the tax back by meeting the 31st October deadline. In addition you can pay up to the limit for your earnings in the current retirement year. The amount will depend on the timing of your retirement, the proportion of the year you work.
 

Protocol

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3,814
Just to clarify - teachers always paid 6.5%, before and after April 1995.

I know this from seeing a teachers payslip for decades.

What changed in April 1995 is the PRSI status.


There are other sectors within the PS where staff moved from 1.5% non-con to 6.5% contributory in April 1995.

In those cases there tend to be two scales, a lower scale for pre-1995 and a scale lifted by 5% after April 1995 to account for paying the higher contribution.
 

podgerodge

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Thanks. If anyone has any further information on this "2 years AVCs' in final year" I would appreciate it. Can't find anything online about it. My understanding is that you would put 1 tranche in before say Oct 22, and claim for 2021, and then another tranche in 2023, claiming for 2022?
 

Early Riser

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@podgerodge
I haven't done it but I don't think it is as complicated as that. If you are retiring this year you make your contribution in one go to your AVC provider (Cornmarket or independent). You can include a contribution in respect of last year in the total but in that case it must be done before 31st October this year and the tax relief claim submitted for 2021 by that date - or the extended deadline if filing online. You can also make your current year claim at the same time. The total amount must be within the Revenue limits for last year and whatever proportion of this year you are working. You need to do it before you actually retire.
Your AVC provider should advise on this.
 
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