# Revenue Maximum Pension benefits and early retirement

#### Ent319

##### Registered User
I just wanted to check my understanding of something is correct re: Defined Benefit pension schemes.

Chapter 6 of the revenue pensions manual sets out rules on the total benefits that can be provided by occupational pension schemes on retirement. For schemes that allow a 1.5X lump sum the general rule is someone can have N/80ths final salary as pension (Where N = number of years of service).

Chapter 5 of the revenue pensions manual sets out the capitalisation factors used to calculate the capital value of someone's pension entitlements and their max benefits.

Question 1: Let's say there's someone who's entered a pension scheme at 30 years old and wants to retire at age 55 after 25 years of service. Their "final salary" is €60,000. Is it correct to say that the maximum pension that can be paid to the individual under revenue rules for schemes is 25/80 * 60,000 = €18750 (Not including State Pension) + whatever the lump sum is?

Question 2: Is the scope for AVCs similarly limited by the N/80ths rule? Or can someone use AVCs to make up the difference between their max limits at what would have been their normal retirement age vs. their actual retirement age? (i.e. the additional 15 years between 25 and 40 years)

Edit: Minors edits for clarity

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#### Homer

##### Registered User
The n/80ths rule is based on a factor of 9 to 1 for converting pension to an equivalent lump sum. This factor no longer applies and the pension equivalent of a lump sum can be calculated by reference to immediate annuity rates at the member‘s date of retirement.

It’s probably simpler to look in the first place at the maximum pension that can be provided prior to any reduction in respect of a lump sum taken on retirement. For people retiring at normal retirement age, the maximum permitted pension is 2/3rds of final remuneration for a member who has completed at least ten years of service. It is reduced pro rata for members with less than ten years service and is inclusive of any retained pension benefits from previous employment or periods of self employment. On early retirement, the above maximum benefit is reduced in line with the ratio of completed service to potential service to normal retirement age.

Normal retirement age can be anywhere between 60 and 70, with earlier ages permitted for certain occupations (e.g. certain sportspeople). If we take your example of the member who joined at age 30 and retires at age 55 and assume that their normal retirement age is 60 and they have no retained pension benefits, then the maximum pension they can have at age 55 is 2/3rds x €60,000 x 25/30 = €33,333 per annum. This pension would then be reduced to take account of the pension equivalent of any retirement lump sum. For the member in question, the maximum permitted early retirement lump sum would be 120/80 x €60,000 x 25/30 = €75,000.

Hope this helps.

#### Homer

##### Registered User
Regarding your question on AVCs, any advance funding can only be done by reference to your projected benefits at normal retirement age. As you point out, the capitalisation factors that can be used are set out in Chapter 5 of the Revenue Pensions Manual. These factors are quite high and your ability to pay AVCs is far more likely to be constrained by the tax relief limits on employee contributions than by Revenue maximum funding limits.

#### Ent319

##### Registered User
Thanks Homer that's really helpful and clear.

So going by the Capitalisation Factors in Chapter 5 of the Pension's manual: If the poor public servant's normal retirement age is 66, they're married and they're male that means if they retired at 55 then maximum pension would be 2/3rds * €60,000 * 25/36 = €27777 PA, with capital equivalent at €767K.

As you say, that seems to leave good scope for AVCs particularly where (i) They're a member of the Single Scheme and (ii) The benefits they receive under the main scheme are being reduced by Cost-Neutral Early Retirement.

#### Homer

##### Registered User
Assuming NRA 66, you’re using the correct capitalisation factor for a married male. But any funding you do must be limited by reference to benefits at NRA. The maximum fund you can target at NRA is 27.6 x 2/3rds x €60,000 = €1,104,000. If you have a standard Public Sector pension of n/80ths (presumably based on salary less a State pension offset) plus a lump sum of 3n/80ths, you will have huge scope to pay AVCs.

And, as you rightly point out, there is absolutely no danger of you breaching Revenue limits if you take Cost-Neutral Early Retirement at age 55

#### Ent319

##### Registered User
OK I think we've found the source of my confusion!

I seem to have been confusing the revenue limits on what can be paid by schemes in Chapter 6 / Chapter 9 of the pensions manual with the revenue limits on maximum allowable total pension benefits someone can have.

What you seem to be saying is that the 2/3rds final salary rule for determining maximum allowable pension benefits for DB scheme members remains in place irrespective of when you retire under your scheme, assuming 2m SFT rule isn't breached. Do I have that right?

#### Conan

##### Registered User
Ent319
You are almost there.
The 2/3rds pension limit is an absolute Revenue limit . Schemes cannot provide a Pension (inclusive of lump sum option) of more than 2/3rds Salary. But the capitalised value can exceed €2m.
However if the capitalised value of the total benefit provided exceeds €2m (actually c€2.06m) then the excess is subject to a tax hit of 40%. So the total value can exceed €2m, its just that any excess is subject to a one-off tax hit.

#### Ent319

##### Registered User
Perfect - thanks! I’ll probably need to stop roleplaying as an actuary at some stage and fork out the money for some independent advice but it’s good to know the scope for AVCs is very wide.