Taking a bonus as pension service credits or AVC instead of cash

[carpedeum]

I am being paid a once off bonus of 4 months gross salary subject to tax and PRSI.
Option 1: I could receive two years pension credits instead of a salary payment i.e. two years would be added to my pensionable service accumulated to date.
Option 2: I could possible use the bonus payment to make an AVC contribution instead.

I am a PAYE worker, aged 45, a member of a defined benefit pension scheme, the normal retirement age being 60. I joined the pension scheme at 20, have 25 pensionable years service, and full pension is based on 40/60th's of my final basic salary. The fund also provides a spouses pension on my death in retirement.

I make AVC contributions with the intention of using the accumulated fund to contribute to any lump sum commuted from my pension fund when I retire, thereby lessening the reduction in annual pension payments. I can also use AVC payments to derive pension benefits from other taxable earnings e.g. bonus, VHI subvention, etc.

What is the valuation of the two years pension credits? Figures of 60,000+ per year have been mentioned for someone of my age and service.

Would I be better off making an AVC payment with the bonus, through my salary in the same month that I receive the bonus? Would an AVC contribution be subject to a maximum 25% of my total gross pay or my basic salary?

What are the advantages of accepting the two years pension credits ie. bumping up my service from 25 years to 27 years?

 

[Guest126]

Take the service credit - the risk is then with employer (of interest rates falling, investment returns lower than expected, people continuing to live longer than before) rather than with you.

It is a generous offer (on the face of it).

 

[ajapale]

What is the financial standing of the company you work for?

What is the financial standing of the DB pension scheme?

Do you intend working beyond age 60? If so, you are better off with the AVC since you will have worked the maximum service of 40 years and the two additional years will be of no benefit.

aj

 

[carpedeum]

Thanks for the replies.

Re the questions from AJ:-
What is the financial standing of the company you work for?
This bonus is being offered as part of a proposed company takeover, by the selling shareholder to reward the loyalty and assuage the worries of staff. The new owner is effectively a new company, but, with very strong venture capital investment. Business plans and future trading and growth, taken at face value, look positive. The previous owners (my current employers) are a long established international company, with a very strong asset base and balance sheet.

What is the financial standing of the DB pension scheme?

The DB pension scheme will be in good standing with an existing shortfall having been met by the previous owner as part of the sale. Note: the DB scheme has been guaranteed for a minimum of three years by the new owner. Presumeably, this will be replaced by a DC scheme after that. Concerns, expressed by employees, regarding the management of the new owner's pension fund, have been answered by the new owner. Their intentions appear ethical ande above board. The new company has a strong union membership. The pension fund will be adminstered by nominated trustees, as it was in the old company.

Do you intend working beyond age 60? If so, you are better off with the AVC since you will have worked the maximum service of 40 years and the two additional years will be of no benefit.
I would like to retire at 60, but, it may be more beneficial to continue working, especially if I am in good health and my longevity loooks positive. I have four children, ranging in age from 17 to 7. I have been informed that I can use excess AVC investments in funding commuting a lump sum on retirement, thereby minimising the reduction in the annual pension payments I will receive. Is this not true? What if I retire from my current employer with full pension, but, continue working withe another employer or become self employed? This latter option would be my ideal.

My pension fund is my primary asset, after my mortgaged home. Like most PAYE workers with families, I have not been able to ride the property rollercoaster!

 

[Guest126]

It is TRUE that if you invest in AVCs it would be useful to take the tax-free cash from there so as not to reduce your annual pension payments when you opt to take the tax-free cash.