Moneymakeover Planning for pension

Personal details

Your age: 45

Number and age of children: 3
Two are adults and one in secondary

Income and expenditure
Annual gross income from employment or profession: 40,000

Monthly take-home pay: 2,650

Type of employment - e.g. Employee or self-employed.
Employer type: e.g. public servant, private company. Civil service

In general are you:
(a) spending more than you earn, or
(b) saving? Saving


Summary of Assets and Liabilities
Family home value: 500,000
Mortgage on family home: none
Net equity: 500,000

Cash: 26,000
Defined Contribution pension fund: I will have 23 years worked for a civil service pension by retirement.


Total net assets:

Other borrowings – car loans/personal loans etc None

Do you pay off your full credit card balance each month? Yes
If not, what is the balance on your credit card?

Pension information

Value of pension fund: no idea of this, I only started working in civil service 2.5 years ago and no pension before that.

Other savings and investments:

Life Insurance:

Life insurance: I pay €30 monthly

Other information which might be relevant

College for my youngest will be covered by my ex so no planned costs for that in the future.

My question is regarding my pension, I intend to either buy AVCs or buy back years and have a full 40 years civil service pension. I’m not sure what the best option is on this.

I currently only pay 20% tax so holding off until I hit the 40% tax bracket. I will then use all money I receive above that to add to my pension.

I will also have the contributions to receive a full state pension.

I’m quite the novice with this kind of thing so grateful for any advice on my pension plan.

May#19 said:

Number and age of children: 3
Two are adults and one in secondary

Income and expenditure
Annual gross income from employment or profession: 40,000

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Are the adult children working and contributing anything to the household?

May#19 said:

Defined Contribution pension fund: I will have 23 years worked for a civil service pension by retirement.

Pension information

Value of pension fund: no idea of this, I only started working in civil service 2.5 years ago and no pension before that.

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Do you mean two different pension here or what?
First step would be to clarify what your existing pension cover is.

May#19 said:

Life insurance: I pay €30 monthly

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Do you need this?
If you died then there is no mortgage or other debts to clear and presumably the youngest child would be cared for by the adult children and/or ex.?

May#19 said:

College for my youngest will be covered by my ex so no planned costs for that in the future.

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Based on your income of €40K (but not clear about other assessable income in the houshold?) wouldn't some or all of tuition fees, student contribution and maintenance be covered by the Free Fees Initiaitive and SUSI grant?

May#19 said:

I will also have the contributions to receive a full state pension

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You can get your PRSI contribution/credits statement from MyWelfare to check what you have right now and if you are on track for the full Old Age Contributory Pension.

May#19 said:

My question is regarding my pension, I intend to either buy AVCs or buy back years and have a full 40 years civil service pension. I’m not sure what the best option is on this.

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There are many existing threads/posts about public service workers using AVCs to boost their PS pension cover that might be worth checking out.

May#19 said:

I currently only pay 20% tax so holding off until I hit the 40% tax bracket. I will then use all money I receive above that to add to my pension.

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Won't that mean only marginal contributions unless you're in line for a significant salary increase imminently?

As ever in the context of a Money Makeover my opinion is that it's critical to get a clear understanding of one's houshold income and expenditure to understand one's base line essential expenditure and to make plans for the future and retirement.

Also make sure that you're claiming all available tax credits - e.g. are you eligible for and claiming the Single Parent Child Carer tax credit for the youngest child? And Child Benefit?

May#19 said:

Pension information

Value of pension fund: no idea of this, I only started working in civil service 2.5 years ago and no pension before that.

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All State and PS pensions in Ireland are unfunded, so you can ignore the references to pension funds.

Thanks for the replies, to answer the questions above

My adult children don’t contribute currently, one is going into the final year of college, and the other is early into an apprenticeship. Both earn enough to cover their own expenses so don’t cost me a great deal.

Only one civil service pension, I don’t have anything outside of that.

I’ve left the college admin to my ex, not sure on details but I’m sure my son is getting what he’s entitled to regarding grants etc.

I have checked my statement on my welfare and I will have a full contributory pension as long as I stay in employment till retirement age.

If I’m below the 40% tax should I still start putting extra into my pension now or wait until my income increases?

My income would be approx 50,000 in about 2.5 years. Max pay for my grade would be about €65,000 possibly a few thousand more with increases by the time I get there.

My living costs are pretty low as I don’t own a car or have debts.

I’m worried I’ve left myself in a bad position regarding my pension, I intend to work up to the full retirement age, my job isn’t stressful and I enjoy it so I’d be happy to stay employed until 66 or whatever the age is by the time I get there. That gives me another 21 years at least in paid employment.

Are you sure the scale goes up that quick? 40K on EO scale takes 5 years to get to 50k. High rate band/threshold may also increase in that time

May#19 said:

If I’m below the 40% tax should I still start putting extra into my pension now or wait until my income increases?

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May#19 said:

My income would be approx 50,000 in about 2.5 years. Max pay for my grade would be about €65,000

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A Single Scheme pension is nearly impossible to predict accurately. But, based on a possible career average salary of €55,000, a rough estimate is for a pension of about €7,000 after 23 years. Obviously it could be more or less based on what career average will be (ignore inflation effects on salary when thinking about this). You indicate that you will be eligible for the full State Pension on top of this (based on your PRSI record).

Again based on career average salary of €55,000 your tax free lump sum may be in the region of €47,000. But the max allowed by Revenue (under current rules) would be €97,000, based on a final salary of €65,000. So you could top up to this amount using AVCs (an extra €50,000 tax free).
I believe there is also a mechanism to purchase "lump sum referrable amounts" in the Single Scheme to achieve the same ends. I am not familiar with the details but it does seem rather cumbersome compared to AVCs (https://singlepensionscheme.gov.ie/...-the-Single-Public-Service-Pension-Scheme.pdf).

Obviously tax relief at 40% is much preferrable to 20%. But, for the the purposes of the tax free lump sum, 20% is still attractive. It can be debated beyond this (see @ClubMan above).

So, based on what @Ruffian posted above, let's assume for arguments sake that you get €7K p.a. from the work pension plus the full OACP which is currently c. €15K p.a. That's €22K p.a. so well within the individual standard rate band of €44K. So you'll be paying 20% tax on your pension income and the tax bill will be reduced by your tax credits. That could be an argument in favour of contributing to an AVC in order to boost your pension income even though you're only paying 20% tax right now and maybe for a while yet. I.e. 20% tax relief on contributions, tax free growth within the pension, tax free lump sum, and then 20% tax on drawdowns. This point is dealt with by @Brendan Burgess in the Key Post:

Brendan Burgess said:

So, you have matched your employer's pension contributions, you have bought your house, and your mortgage is down to a comfortable level, should you contribute to a pension if you are getting only 20% tax relief on the contributions?

If you are never going to be paying 40% tax because you are in your 50s and you have reached peak earnings, then getting tax relief at 20% is worth it.

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May#19 said:

I currently only pay 20% tax so holding off until I hit the 40% tax bracket. I will then use all money I receive above that to add to my pension.

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May#19 said:

Your age: 45

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May#19 said:

Cash: 26,000

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The Key question is: If you contribute now at 20%, will you have less to contribute later at 40%?

The answer is not clear to me. We do not know how much of your income will be taxed at 40% against which pension contributions are most efficient.

But what do we know for sure?
1) when you are paying 40% tax, you should be paying enough contributions for all income at 40%
2) You have 20 years left to make contributions

When you are 50, you will be able to contribute 30% of your income and get tax relief on it. But if your salary is say €50k, it's unlikely that you will be able to afford to contribute €15k - net cost €9k each and every year. So you are at no risk of not being able to max your pension contributions if you don't contribute anything now.

By the same token, unless you get a lot of promotions, it is unlikely that by contributing now, you won't be able to afford to contribute enough to clear the 40%.

The advantage of contributing now even if you get only 20% tax relief is that it will grow tax-free and will eventually be taxed at an effective rate of 15%. (20% of 75% after 25% tax-free lump sum)

My gut feeling is to hold off contributing now.
You still have dependent children.
You might need your cash for them.
Having €26k handy for the next 5 years could come in very useful.

When the kids are no longer dependent and you have more clarity on your income, then revisit the question and the answer will probably be to max your contributions even if you are getting only 20% tax relief.

A small kicker is that from time to time it is suggested, that the 40% tax relief should be scrapped and everyone should get 33% tax relief. If that happens, you would be kicking yourself for having contributed at 20%

Brendan