Resign or retire? Impact on AVC

[mendacity]

Hi, so I am looking at leaving my public service job next year aged 55 with 30 years of service. I plan to work on a contract/agency basis until aged 60 and then defer pension until then.

My question are:-

Are there any advantages or considerations.between retirement over resignation at 55?

I have some funds in an AVC which I would like to partially draw down next year at 55. Is this possible and would I need to retire to do so?

With thanks
Mendacity

 

[NoRegretsCoyote]

Are there any advantages or considerations.between retirement over resignation at 55?

If you retire at 55 you get an actuarially reduced pension straight away. If you resign you get a preserved pension which you draw down from 60. The preserved pension is of course greater.

It would be useful to know:

• What is your current salary?
• What would your contract income be until 60?
• Are you male or female?

From that we could work out roughly what the actuarially reduced pension is and your marginal tax rate before and after 60. In general early retirement is worse value for men because they live shorter on average but the same actuarial reduction factor is applied.

I have some funds in an AVC which I would like to partially draw down next year at 55. Is this possible and would I need to retire to do so?

Edit: no, as clarified below.

 

[Early Riser]

Are there any advantages or considerations.between retirement over resignation at 55?

If you want to take an actuarially reduced pension you take the Cost Neutral Early Retirement option. If you want to defer the drawdown and take your full pension entitlements at 60 you resign.
You can only access your AVC fund when you take your main pension benefits. So the only way to do so at 55 is to take CNER.

I plan to work on a contract/agency basis until aged 60 and then defer pension until then.

I take it you have been paying modified rate PRSI (D or B)? If so, you can become eligible for a partial State Contributory Pension by paying full rate contributions after you retire/resign. You need a minimum of 260 contributions (5 years) for a pro-rata pension (calculated on the basis of your combined full rate and modified rate contributions). Obviously the more rate full contributions the better but 260 is the minimum. Even credited full rate contributions count once you have paid the minimum of 260.

 

[mendacity]

Thanks for the replies. I have looked at my figures on actuarial reduced v deferred benefits and I think deferred benefits is a better option for me.
My Retirement salary is approx 90k x 30 years service. I will have approx 45k AVC. I am looking at retire/resign at 55 and defer benefits until 60?
Re AVCs - is there an option to make a partial withdrawal (of 25%?) at 55 in advance of my deferred pension lump sum at age 60?

 

[Early Riser]

I am looking at retire/resign at 55 and defer benefits until 60?
Re AVCs - is there an option to make a partial withdrawal (of 25%?) at 55 in advance of my deferred pension lump sum at age 60?

No. Not with an AVC linked to a defined benefit pension. If you want to access it at 55 you need to go for CNER.

 

[Conan]

You can only access the AVC pot when you access your main scheme benefits, ie retire and draw your pension/lump sum.

 

[Mamamia22]

What is the reluctance to access the CNER option @ 55. You will get 5 more years of your pension. You can work as well. Is there much of a difference between CNER and preserved options ?

 

[Early Riser]

What is the reluctance to access the CNER option @ 55. You will get 5 more years of your pension. You can work as well. Is there much of a difference between CNER and preserved options ?

CNER at 55 with a normal retirement age of 60 results in getting about 78% of the preserved pension and 91% of preserved lump sum.

 

[NoRegretsCoyote]

I take it you have been paying modified rate PRSI (D or B)? If so, you can become eligible for a partial State Contributory Pension by paying full rate contributions after you retire/resign. You need a minimum of 260 contributions (5 years) for a pro-rata pension (calculated on the basis of your combined full rate and modified rate contributions

So assume the OP starts consulting at age 55 and works on a contract/agency basis for five years to get at last 260 contributions (Class A or Class D). He then draws down at least €5k a year from the AVC pot from age 60 and makes Class S PRSI contributions of €500 a year for six years.

This gets him 11 years full rate contributions (Class A/S) and 30 years modified rate contributions (Class B or D). If I read the rules correctly he then qualifies for 11/40 of a full state pension of €252 a week/€13,800 a year, so about €3,800 a year from 66.

I know this isn't the question originally asked but it might be a useful strategy to get a partial state pension on top of the public service one.

*In the scenario above I don't think it matters whether he takes CNER at 55 or draws pension from 60*

 

[stoves1]

Speaking from experience, i woud take CNER now at 55, and not preserve the benefit till 60. You say you plan to work again so fine, you have paid into a pension for 30yrs, might as well take benefits now as one never knows what health issues etc ( hopefully none) that may arise, and enjoy your semi- retirement

 

[Early Riser]

So assume the OP starts consulting at age 55 and works on a contract/agency basis for five years to get at last 260 contributions (Class A or Class D). He then draws down at least €5k a year from the AVC pot from age 60 and makes Class S PRSI contributions of €500 a year for six years.

This gets him 11 years full rate contributions (Class A/S) and 30 years modified rate contributions (Class B or D). If I read the rules correctly he then qualifies for 11/40 of a full state pension of €252 a week/€13,800 a year, so about €3,800 a year from 66.

I am not really on top of the rules for Class S but that certainly seems feasible in principle.

My Retirement salary is approx 90k x 30 years service.

*In the scenario above I don't think it matters whether he takes CNER at 55 or draws pension from 60*

No, CNER or Preserved Pension should not make a difference in this scenario.
However, he has only €45k in his AVC fund and if he takes the Preserved Pension at 60 he can top up his tax-free lump sum with €33,750 of this (to bring it to 120/80 of pensionable salary). His max tax-free draw down would be slightly less with CNER at 55 but it would still leave him with an insufficient amount to maximize Class S after 60 in the way you suggest. I don't know the actuarial calculation but I would be inclined to jump for the maximum tax-free drawdown.

 

[Early Riser]

Speaking from experience, i woud take CNER now at 55, and not preserve the benefit till 60. You say you plan to work again so fine, you have paid into a pension for 30yrs, might as well take benefits now as one never knows what health issues etc ( hopefully none) that may arise, and enjoy your semi- retirement

I don't know the actuarial calculation but I suspect it would favour the Preserved Pension at 60 option. However, most people who take CNER are not likely to be doing so for financial gain but because they want out - whether to pursue other alternative vocational options or to enjoy the benefits of retirement while they can.

 

[S class]

but it would still leave him with an insufficient amount to maximize Class S after 60 in the way you suggest.

He could drawdown 5000 euro per year for two years and then make voluntary contributions based on the S class contributions at a cost of 500 euro per year.

 

[NoRegretsCoyote]

I don't know the actuarial calculation but I suspect it would favour the Preserved Pension at 60 option.

"Cost neutral" calculations are done by actuaries who are employed by the state to ensure that it doesn't lose out, so it will never favour the retiree.

It also tends to favour women over men because (on average) a man is more likely to die before normal retirement age but the same actuarial coefficient is used for both sexes.

But this shouldn't be material really in any decision decision. What matters much more is the needs for your lifestyle and your marginal tax rate.

 

[Early Riser]

CNER was strongly advocated by the PS unions and came in at the time of Partnership about 20 years ago. I'd guess they had quite a strong input into the actuarial process at the time as well.
One thing that has changed in the interim is increased life expectancy for 55-65 year olds. The longer one lives in retirement the more the financial consideration of the pension options favours normal retirement over CNER. If you are going to pop off at 68 then CNER is better financially - but at 88 it reverses!
But, as you say, it is not primarily a financial consideration.

 

[NoRegretsCoyote]

CNER was strongly advocated by the PS unions and came in at the time of Partnership about 20 years ago. I'd guess they had quite a strong input into the actuarial process at the time as well.

You are in fact right.

For an SPS member someone retiring on 60 with an NRA of 66 and forty years service will get an 81% of normal pension amount and a 98% lump sum.

Life expectancy (simple average of male and female) is 24 for an Irish 60-year old, it's 19 for a 65 year old.

So your choice (crudely) is 81% for 24 years or 100% for 19 years. To my surprise 24*81% is actually more than 19*100%, although the lower lump sum offsets this a bit.

So it seems that it is genuinely neutral or slightly in favour of the early retiree.

 

[Early Riser]

SPS may differ from the traditional PS pension as it was launched in a different economic era.

Here is a crude calculation based on a traditional pension (not coordinated). I am omitting the lump sum and future indexing for convenience.

John is retiring at 55 with 30 years service on a pensionable salary of €80,000. His preserved pension is €30,000.

Lets first say he pops at 68. If he opts to take this Preserved Pension at 60 his annual payments will have amounted to €240,000. If he had instead opted for CNER at 55 his annual pension of €23,400 would have amounted to €304,200. So an advantage of €64,000 for CNER.

Now say he lives until 88. His Preserved Pension payments would then cumulate to €840,000. If he had taken CNER his annual payments would accumulate to €772,000. Now it is advantage €68,000 to the Preserved Pension. A reverse in financial fortunes!

In this example the crossover age for advantage to the Preserved Pension over CNER would be approximately 78 (below current average life expectancy).

The Preserved lump sum is also more favourable than CNER - apart not being actuarially reduced, it is calculated in relation to the salary pertaining to his grade at 60 instead of 55 (when he actually retired/resigned). And salary-linked pension increases after retirement are also likely to favour the Preserved Pension option.

In general for traditional PS pensions the financial balance between CNER and Preserved Pension will shift gradually and linearly with increasing survival age. Fortunately for the government the actuarial tables have not been re-adjusted to reflect this increase in life expectancy.

 

[NoRegretsCoyote]

In this example the crossover age for advantage to the Preserved Pension over CNER would be approximately 78 (below current average life expectancy).

Indeed a 55-year old is expected to live until 83 now.

SPS may differ from the traditional PS pension as it was launched in a different economic era.

I hadn't realised that they used a different actuarial adjustment for the SPS. It's a bit of a mess.

 

[Allpartied]

SPS may differ from the traditional PS pension as it was launched in a different economic era.

Here is a crude calculation based on a traditional pension (not coordinated). I am omitting the lump sum and future indexing for convenience.

John is retiring at 55 with 30 years service on a pensionable salary of €80,000. His preserved pension is €30,000.

Lets first say he pops at 68. If he opts to take this Preserved Pension at 60 his annual payments will have amounted to €240,000. If he had instead opted for CNER at 55 his annual pension of €23,400 would have amounted to €304,200. So an advantage of €64,000 for CNER.

Now say he lives until 88. His Preserved Pension payments would then cumulate to €840,000. If he had taken CNER his annual payments would accumulate to €772,000. Now it is advantage €68,000 to the Preserved Pension. A reverse in financial fortunes!

In this example the crossover age for advantage to the Preserved Pension over CNER would be approximately 78 (below current average life expectancy).

The Preserved lump sum is also more favourable than CNER - apart not being actuarially reduced, it is calculated in relation to the salary pertaining to his grade at 60 instead of 55 (when he actually retired/resigned). And salary-linked pension increases after retirement are also likely to favour the Preserved Pension option.

In general for traditional PS pensions the financial balance between CNER and Preserved Pension will shift gradually and linearly with increasing survival age. Fortunately for the government the actuarial tables have not been re-adjusted to reflect this increase in life expectancy.

A 55 year old will have very different spending habits from an 85 year old.
So, in my book its worth having the money when you are younger and able to spend it on stuff that makes life enjoyable.

The obsession with equalising the income over 25 or 30 years, I think, comes from the US , where older people spend a fortune on medication, surgery, insurance, care homes and other health related costs. We really don't have that here. Public healthcare is pretty good and improving all the time. Our system of medical cards, drug cards and Fair Deal, mean those costs are much more manageable.
So, my advice, is to take the CNER and throw off the yoke of the daily grind and make the most of the pension, now, when you can, actually spend it.
Most of the Preserved pension excess will end up being handed over to the next generation.