Public Sector Pensions
Public sector pensions are generally defined benefit schemes and your pension will be dependent on your number of years service.If you wish to maximise your pension you can do this by one of the following:
- Purchase of notional service under their occupational pension scheme, also referred to as ‘buying back years’
- Additional Voluntary Contributions (AVCs)
- join a nominated Group AVC arrangement or
- take out a PRSA AVC.
Purchase of Notional Service (PNS)
Public servants who will be short of 40 years service by their minimum retirement age can opt to purchase one or more missing year’s service by making a recurring or lump sum contribution to their employer.
The years service purchased is treated as actual service when calculating pension and lump sum entitlements at retirement. So having purchased the missing years your pension will be calculated by reference to 40 years service.
If you are unsure as to whether you qualify to purchase additional service you should contact you HR department.
Main advantages of PNS are:
- Defined benefit scheme, benefits are guaranteed and certain
- the cost is known
- contributions attract tax relief
Main disadvantages of PNS are:
- not available if you have full service (40 years) at normal retirement date
- if you retire earlier than expected, you will not get the full benefit you expected
- it is not possible to target one benefit such as tax free lump sum
- the investment cannot be turned into an approved retirement fund (ARF).
Additional Voluntary Contributions (AVCs)
If you do not wish to purchase notional service (‘buy back years’) or you will have the maximum service allowable at retirement age, you can still top up your pension by making additional voluntary contributions.
You can join a nominated group AVC arrangement (often arranged by public sector unions), or you can set up a PRSA AVCs.
An AVC is a tax efficient payment you can make to enhance your retirement benefits and give you greater options at retirement. There is a lot of flexibility in the way that a fund provided by an AVC can be used. The fund at retirement can be:
- taken as a tax free cash (subject to Revenue limits)
- taken as a taxable lump sum
- purchase or invest in an Approved Retirement Fund (ARF)
- used to purhase an Annuity
- used to purchase notional service under the PNS scheme
The main advantages are:
- flexibility – you can stop/start contributions, increase and decrease contributions easily and to any level within Revenue limits. You can adjust them to a level which is the most tax efficient, for example only on the portion of your salary taxed at 41% but not that at 20%.
- you have control over where fund is used (subject to Revenue limits) i.e., can fund to maximise the tax free lump sum only
- contributions attract tax relief
- AVCs are the only method of savings which gives Superannuated public sector workers access to Approved Retirement Funds (ARFs)
- you can help to fund early retirement
The main disadvantages are:
- AVCs are a defined contribution arrangement so the individual bears the risk
- AVC contributions are subject to fees and charges
- you won’t know what the fund will be until retirement.
If you are a public sector employee and wish to maximise your pension there are a number of factors to be taken into account before deciding on the PNS option or the AVC option. Please contact us at MDL Financial Services and we will be happy to advise you.