Merits of Public Sector AVC

A

AugustaRory

Registered User
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Hi.

I'm trying to figure out the merits of making an AVC for 2025.
  • Public Sector worker in 40s
  • Joined pre-2005
  • Close to full 40 years' service at retirement age (which is 60)
  • €117k a year salary
  • Scope for a €23,141 contribution so cash cost would be €13,885
  • Have the money to do it.
  • Might retire early (at circa 50)
Thanks a mill.
 
The only way a PS can retire early at age 50 is via ill-health early retirement or via taking CNER.

And I'm not sure whether CNER is available at age 50 or 55.

Have you checked this?
 
AugustaRory said:
Scope for a €23,141 contribution so cash cost would be €13,885
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Might you be putting this money in with 40% tax relief (but after USC/PRSI) only to take it back out subject to 40% tax plus USC/PRSI (other than on any tax free lump sum) in a few years?

What is your likely early retirement income? And are you single or does your spouse's income need to be considered when assessing the tax and overall retirement/financial situation?
 
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Somewhere in the back of my mind something is telling me that money in an AVC PRSA can be taken out tax free if it's used to bridge the gap between the actual tax free lump sum and the Revenue maximum. If that's the case, might it be possible to get 40% relief on the way in and pay nothing on the way out?

We're married and the query relates to my spouse, sorry. We're comfortable enough financially so this is really a case of trying to get things set up correctly.

Thanks for your help.
 
AugustaRory said:
Somewhere in the back of my mind something is telling me that money in an AVC PRSA can be taken out tax free if it's used to bridge the gap between the actual tax free lump sum and the Revenue maximum. If that's the case, might it be possible to get 40% relief on the way in and pay nothing on the way out?
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Yes, that is one of the main reasons people do AVCs.

Althrough the closer a PS is to full service, the less scope there is to do what you describe.
 
Protocol said:
Althrough the closer a PS is to full service, the less scope there is to do what you describe.
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That's why it's important to clarify what the intention is here. Early retirement at 50, retirement at 60 with 40 years service and the full 1.5 times final salary lump sum (I presume), or somewhere in between in which case, how close to 60?
AugustaRory said:
  • Close to full 40 years' service at retirement age (which is 60)
  • ...
  • Might retire early (at circa 50)
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I presume that the job offers some advisory service in this regard? Although, if it's Cornmarket then caveat emptor as they might just push you towards AVCs regardless because they have a vested interest in selling them.
 
AugustaRory said:
Somewhere in the back of my mind something is telling me that money in an AVC PRSA can be taken out tax free if it's used to bridge the gap between the actual tax free lump sum and the Revenue maximum. If that's the case, might it be possible to get 40% relief on the way in and pay nothing on the way out?
Click to expand...

Yes that's a big incentive to contribute AVCs. But be aware that the methods of calculating both the public sector scheme lump sum AND the Revenue maximum lump sum are impacted by a decision to retire early. I'd agree with @ClubMan - you'd need to clarify which of the PS pension schemes she's in, exactly what age she plans to retire at, full service and salary details - and then it would be possible for a financial broker to calculate exactly what her scope to efficiently contribute AVCs might be. As you can see, there's quite a few variables in the calculations, so even "ballpark" calculations would be difficult to do without specific information.
 
Thanks LD. She is in the Post 1995/Pre 2004 Scheme. She is 46 and has 25 years' service now. At NRA, which is 60, she'll have 39 years' service. Her salary is €117k. In terms of when she retires, we're leaning towards 50. We vaguely understand that it's possible to 'retire early' and get some kind of actuarily reduced pension and lump sum. Not working those last 10/11 years will clearly impact her retirement income but we're building an investment portfolio which we plan to move into her name to get as much of the dividend income as possible out at the 20% rate. I read somewhere that Revenue's max lump sum calculation is 1.5 times once you've done 20 years. I don't know if that's correct, but if it is my sense is that we should have an amount in a PRSA equal to the difference between (€117k x 1.5) and the actuarily reduced lump sum. Thanks again.
 
If she takes CNER at age 50 with 29 years service her actuarily reduced lump sum would be about €104,500.

As she has more than 20 years service the maximum lump allowed by Revenue at NRA would be 117k*1.5 = 175.5k. But Revenue reduce this in the event of retirement before NRA. I think the formula in your wife's case (retiring at 50) would be 175.5k *29/39 = €130.5k (29 for actual service years and 39 for potential service to NRA).

So she could use an AVC fund take €130.5k - €104.5k = €26k to top up the CNER lump sum to the Revenue max.
 
@Saturn has done the spade work. I'd just add a small point that a lump sum of 1.5 x salary at 20 years assumes that she has no pension benefits from previous employments. If she has, they need to be taken into account in the calculations. Alternative method of calculating the lump sum is 3/80 salary for each year of service (so it would take 40 years to reach 1.5 x salary.) But with the second method, any pension benefits from previous employments can be ignored. You're free to choose whichever method gives you the better result.
 
I don't know your wife's plans if she takes CNER at 50 and this may not fit in with your overall financial and family situation. But an alternative would be for her to retire (resign) at 50 with a preserved pension. At 60 she could take her full benefits for 29 years service without actuarial reduction. The Modeller indicates that this would give an annual pension of about €31k and a lump sum of €127k. That is against a pension of about €19.5k and a lump sum of €104.5k under CNER.

With a preserved pension she could top up her lump sum to the full 1.5 times pensionable remuneration limit from the AVC - again at 60. (But see @LDFerguson's caveats about this).

Under either/both scenarios she may be eligible for a Supplementary Pension from 60 if she meets the criteria (not receiving a relevant SW benefit and not in insurable employment). Also, your plans need to consider if and how she maintains her PRSI record after 50 - a total of 2080 reckonable contributions required if she wants to get the State Pension at the maximum rate at 66/67.
 
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