What is Superannuation?
Superannuation is the name given to the benefits and entitlements that public sector workers are entitled to. It comprises of the following;
- A once-off Tax free lump sum that is paid to you on retirement.
- A pension income
- Death in service benefits which are paid to both your Spouse and children if you die in Service.
- Sick pay entitlements that are paid to you to replace your income for a period of time if you are unable to work due to sickness or injury.
How your pension benefits are actually calculated:
1. Tax Free Lump Sum
For every year that you work, you are entitled to 3/80ths of your final salary as a tax-free lump sum. If you work 40 years as a public sector employee, you will have a maximum years of service that a public sector employee can work for pension purpose.
Therefore, the maximum TFLS that any employee can be entitled to is;
40 years x 3/80th = (120/80) x Final Pensionable remuneration.
The formula is as follows;
(Number of years’ service at retirement x 3/80) x final Salary
John is a teacher. He is an A1 class PRSI payer and he is on annual salary of €65’000. When John retires next year, he will have 30 years’ service worked.
He will be entitled to a Tax Free Lump Sum (TFLS) as follows;
(30 years x 3/80th) x €65’000 = €73’125
If John decided to work on 2 extra years, then his years’ service would increase to 32 years at retirement. His TFLS will be therefore be;
(32 years x 3/80th) x €65’000 = €78’000
2. Pension Income calculations explained
For every year that you work, you are entitled to 1/80th of your final Pensionable Salary as a pension income on retirement. 40 years is the maximum years of service that a public sector can work for pension purposes. Therefore, the maximum pension that anyone can be entitled to is:
40 years x 1/80th = 40/80th x final pensionable Salary
The Formula for this calculation is as follows;
(Number of yrs. service at retirement x 1/80ths) x Pensionable Salary
If Johns has 30 years’ service completed at retirement, is a D1 PRSI payer and has a salary of €65’000, his pension will be calculated as follows;
(30 years x 1/80th) x Final Pensionable Salary
30/80 x €65’000 = €24’375
3. Death-in-Service Benefit Calculations
If an employee dies in service, then the remaining family/ personal legal representative may be paid a lump sum equal to the greater of:
- One times annual salary at the date of death OR
- The retirement lump sum that would have been received if they had retired on grounds of ill-health on the date of death (maximum 1.5 times salary).
Broadly speaking death in service pays one times salary if you have less than 20 years’ service and 1.5 times salary if over 20 years’ service.
4. Spouses/Civil Partners and Children’s Pension:
If an employee dies in service or dies after retirement, there is a pension to be paid to the surviving spouse or civil partner, and where applicable their children.This is based on what the pension the deceased would have received at normal retirement age (NRA).
The main benefits of the scheme for spouse/civil partner:
- They will receive a pension equal to half of the deceased pension holders maximum potential pension.
- If death occurs in retirement, the surviving spouse will receive half pension.
The main benefits of the scheme for children are:
- They will receive 1/3rd of the deceased potential pension, for each child up to a maximum of three children.
- If there are more than 3 children, 50% of the potential pension will be divided equally among them.
Children up to 22 and in full time education, or if they are permanently incapacitated, qualify for this entitlement.
Sick Pay Entitlements Explained:
A public-sector worker is entitled to the following sick pay entitlements:
- Three months (92 days) full pay in a one year period followed by three months (91 days) half pay. This is subject to a maximum of 183 days paid sick leave in a rolling four-year period.
After this leave you may also be entitled to Temporary Rehabilitation Pay (TRP) for a further 18 months (see below for explaination).
However, if an employee has a critical illnesses or serious physical injuries, then the sick pay arrangements change as follows;
- Six months (183 days) full pay in a one year period followed by six months (182 days) half pay. This is subject to a maximum of 365 days paid sick leave in a rolling four-year period.
The ‘rolling four-year period’ means that all sick leave (both certified and self-certified) taken over the previous four years, up to the date of the current illness, is taken into account when calculating eligibility for further paid sick leave.A further look-back of 12 months will determine what rate the sick leave should be paid at.
After this leave you may also be entitled to Temporary Rehabilitation Pay (TRP) for a further 12 months. This then ceases after 2 years.
Temporary Rehabilitation Pay (TRP):
- If you have exhausted your sick pay entitlements and are still unfit to work, then you may be granted Temporary Rehabilitation Pay.
- This will bring you to a total sick pay entitlement of maximum 2 years.
- Temporary Rehabilitation Pay is calculated in the same way as ERP (see below).
- Temporary Rehabilitation Pay will only be available when there is a realistic prospect that you will be able to return to work following your illness.
Ill Health Early Retirement Pay (ERP):
- After you have exhausted your TRP entitlements (2 years maximum) you then have the option to retire early due to ill-health.
- To qualify for this payment, you must be incapable of performing your day to day duties and the illness will most likely be permanent.
- You will be paid an immediate pension and will be awarded ‘ill-health added years’.
- Actual pensionable service plus ‘added years’ are used in calculating your pension and lump sum.
So, for example if you have from 5 to 10 years’ service, then you get double the years that you have worked as added years.
Once you have 13 years or over, you are only entitled to 6.66 added years.
- If a pregnancy- related illness occurs before maternity leave commences and you are medically certified as unfit for work due to pregnancy-related illness prior to the commencement of maternity leave and you have exhausted your entitlement to sick pay in accordance with the normal sick leave rules, you will continue to receive sick leave at half pay (less any social welfare benefit to which you may be entitled to) for the duration of your illness until maternity leave commences.
- If you are unfit for work following maternity leave (irrespective of whether or not the illness is related to pregnancy or childbirth) your entitlement to sick leave at half-pay will be extended by the period of absence due to pregnancy-related illness.
If you give birth to a child, or reach the 24th week of pregnancy, you are entitled to 26 weeks paid maternity leave and 16 weeks’ additional unpaid maternity leave.
- Maternity leave will ordinarily begin on such day as you select, unless medically certified that the leave should commence on a particular date.
- However, the commencement date must be not later than 2 weeks before the due date and four weeks must be taken after the baby’s birth.
- If the birth occurs in a week before you started your maternity leave then the maternity leave must start immediately and the employer must be informed.
- Unpaid maternity leave commences on the day immediately following completion of paid maternity leave, you have the option to take a maximum of 16 consecutive week’s statutory additional unpaid maternity leave.
- If you avail of statutory additional unpaid maternity leave you may be entitled to receive PRSI credits.
Additional Voluntary Contributions (AVCs) Explained:
AVC’s are a simple and tax efficient way of saving for your retirement. They are extra contributions made to increase your pension.The main advantage of AVC’s is that the employee gets income tax relief on contributions into an AVC.
E.g. Joanne is a nurse on €50’000 per annum. For every €100 Joanne puts into an AVC, it only really costs her €60 as she does not pay income tax on her contributions into an AVC. If Joanne took this same €100 out as salary, she would have to pay €40 income tax. Please see below comparison of AVC vs. Savings and the difference in funds accumulated over a 5 year period
Tax Liability on taking money out of your AVC
You may or may not be liable for tax on drawdown of your AVC. It all depends on your circumstances.
For example, if you are overfunded, you could be liable to pay tax at your marginal rate at the time (20% or 40%).
Alternatively, if you are underfunded and have a tax free lump sum shortfall, you will pay no tax on exit for this amount.
So, when should a Public sector worker contribute into an AVC?
If you do not have the maximum number of years’ service at retirement (40 years), then it is very beneficial to pay into an AVC to fund for your Tax- free lump sum shortfall. You will not pay any income tax on exit on this amount.
- If you have less than 40 years at retirement it is advisable to start contributing into an AVC.
- If you have close to 40 years service at retirement, it may not be beneficial to contribute into an AVC.
John is a teacher on €65’000 and will have 30 years’ service completed when he retires in 2 years’ time. John’s tax- free lump sum will be as follows;
TFLS Formula = (No. of years service at retirement x 3/80ths) x Pensionable Salary)
(30 yrs x 3/80th) x 65000 = €73’125
The maximum TFLS that John is entitled to if he worked 40 years is;
(40 yrs x 3/80th) x 65000 = €97’500
…John has a TFLS shortfall of €24375 (€97’500-€73125). John is therefore underfunded.
The revenue will allow John to fund for this shortfall using an AVC.
It is very beneficial for John to pay €24’375 into an AVC as he pays no income tax on contributions into the AVC and also pays no income tax on retirement when drawing down the AVC.
In summary John’s tax-free lump sum on retirement will be as follows;
John’s own TFLS (30 years x 3/80th x 65000) €73125
His AVC contributions €24375
Total TFLS €97500
By contributing to an AVC John will have saved €9’750 (€24’375 x 40%). If he did not contribute this amount into an AVC, he would have paid this amount in income tax from his salary.
So, When is it not so beneficial to pay into an AVC?
If John had 40 years service completed at retirement, he would not have a tax-free lump sum shortfall and therefore would pay tax on his AVC funds on draw down. In the above example, John’s AVC funds of €24’375 would have to be drawn down as follows;
Use the funds to purchase an annuity – buy a pension income. Annuity rates are very low at the moment so this is a very expensive option. Income tax, USC and PRSI would be due on this income. (PRSI is only paid to age 66).
Invest the funds in an Approved Retirement Fund (ARF). This is the most tax efficient option at present.
Take the AVC funds as a taxable cash lump sum and be subject to tax, USC and PRSI.
Use the funds to buy back Notional or actual years service. This is usually a very expensive option and not advisable in most circumstances. The cost benefit analysis deters most public servants from this option.
If you already have a lot of money in your AVC and you are over funded, then you need some expert tax Planning advice to avoid paying over half of these funds to the Revenue on draw-down.
What is a last minute AVC?
A last minute AVC is where an individual contributes into an AVC in the months leading up to his/her retirement. It is used if you have a tax-free lump sum shortfall and are underfunded in your AVC. It is a fantastic tax planning tool and should be used by everyone who has such a shortfall.
For example, if John has a TFLS shortfall of €20’000 and no funds in an AVC, he can contribute €20’000 into one and get €8’000 back at the end of the year as tax relief.
Calculating your Reckonable years or Service and Remuneration:
What is Pensionable Remuneration?
Generally speaking, pensionable remuneration is final pay (i.e. salary payable on the last day of reckonable service), plus the average annual total of any other pensionable allowances which are considered for superannuation purposes in the last three consecutive years.
This is due to change in the near future and will be based on the average of the best of three consecutive years’ pensionable allowances in the final ten years of service. The benefits may, in some cases be based on an average salary. For instance, if within the last 3 years of service, an employee has changed grade (e.g. been promoted) or received a personal charge in pay, an average pay figure will be used which takes account of the final salary of the former grade and the relative periods spent in the two grades in the last 3 years. Where the person is retiring on the grounds of ill-health, averaging does not apply if the person had the potential for service to avoid the averaging.
Pensionable allowances include:
- Approved special allowances payable in respect of higher qualifications or higher degrees.
- Approved allowances payable in respect of special certificates
- Approved allowances in relation to special duties, or for working in particular work areas (e.g. location allowances, theatre allowances paid to nurses)
- Living out allowances and approved stand by.
- Approved allowances payable to staff rostered within normal working week for weekend, night, bank holiday duty.
Non-Pensionable Allowances include:
The following are not included in your pensionable remuneration;
- Overtime payments, call-out/on-call allowances apart from the special allowances referred to above, are not normally pensionable.
- Overtime, commission, gratuity, special fees, travelling and subsistence allowance are not pensionable payments.
- Special work of a casual or temporary nature, payments for filing a post temporarily.
Difference between Pensionable Remuneration for A1 and D1 Employees
Pensionable Remuneration is different for an A1 and a D1 PRSI payer when calculating pension income;
D1 employees = Final pay plus pensionable allowances
A1 employees = Final pay plus pensionable allowances minus twice state pension (€24’034).
Please note that A1 and D1 pension calculations only differ when calculating pension income – not calculating their Tax Free Lump Sum. In this TFLS calculation, there is no subtraction of twice the state pension (€24’034) for PRSI payers.
What is ‘reckonable’ service?
Service of various kinds must be considered when adding up just how many years of superannuated service you will have at retirement age. Service which counts for this purpose are often called ‘reckonable’ service includes:
- Full-time paid, established service
- Job-sharing or work-sharing service
- Non-established service given before appointment to an established post.
- Certain part-time service (on a pro rata basis)
- Additional service or added years granted in certain circumstances.
- Purchased service.
What are the arrangements for the transfer of reckonable service?
The transfer scheme enables public sector employees to transfer reckonable service between the civil service and the majority of State and semi-state organisations e.g. the Garda Siochana, The Defence Forces, Health Services, teaching etc.
A list of the ‘transfer network’ organisations may be consulted in your Personnel Unit. Employees should notify their Personnel Unit of any previous employment in the public service and employees resigning should state the name of their prospective employer (if any) so that reckonable service can be transferred, if appropriate.
Job sharing is the sharing of a full-time post on a 50:50 basis or a reduction of hours to 50% of a full-time position.
The minimum period for which a job-sharing arrangement may occur is one year. If you wish to job share you must submit the required application form to your employer.
Taking a Career Break
You can be granted a career break for any of the following reasons:
- Domestic reasons e.g. child-rearing
- Educational purposes, e.g. to attain a postgraduate qualification
- Foreign travel
You must have completed your probation period to be eligible to apply for a career break.
If you are still on probation you may be granted a career break in exceptional circumstances e.g. to cope with unusual domestic difficulties, however your period of probation is extended by the length of the career break.
The minimum period for a career break is one year (except where leave is required to cope with unusual domestic difficulties) and the maximum period is five years.
Normal Retirement Age (NRA)
If you were employed before 1st April 2004, your normal retirement is 60.
If you were employed between 1st April 2004 and 31st December 2012, your normal retirement age is 65.
If you were employed on or after 1st January 2013 your minimum retirement age is the state pension age (68) to a maximum retirement age of 70.
If you are a teacher who has reached the age of 55 and has 35 years’ pensionable service, you may retire. (Two years will be credited for a 4-year training period, one year for a 3-year training period, to assist a teacher reaching the 35-year threshold)
So if you are a primary teacher you can retire at 55 with 34 years pensionable service (or whatever age you complete 34 years’ service).
If you are a secondary school teacher you can retire with 33 years pensionable service (or whatever age you complete 33 years service.
Financial Emergency Measures in the Public Interest (FEMPI):
The Financial Emergency Measures in the Public Interest FEMPI Act 2013 provides for the reduction in remuneration for certain public servants currently on salaries of €65’000 and greater (inclusive of allowances in the nature of pay) and to persons whose salaries (inclusive of allowances in the nature of pay) rise above €65’000 on or after 1st July 2013.
Annualised amount of reduction:
Any amount up to €80’000 (5.5%)
Any amount between €80’000 – €150’000 (8%)
Any amount between €150’000 – €185’000 (9%)
Any amount over €185’000 (10%)
Remuneration will not fall below €65’000 as a result of the application of the reductions set out above; pro rata reductions apply to staff who work on a part-time or work-sharing basis.
Cost Neutral Early Retirement
If you retire prior to your NRA or before you qualify for the 35 year rule (pre-2004 employees only), you have two options in drawing down your pension:
- Defer drawing down benefits until NRA to avoid any penalties
- Draw down pension benefits and incur the relevant penalties to your tax-free lump sum and pension.
Some public sector professionals qualify for additional Notional added years which is over and above the actual years that they worked. The added years differs from job to job. 10 years is the maximum added years with which any employee can qualify for. Some examples include, Army Officers, Gardai, various Medical consultants.
Buying Back Years:
If you are likely to have less than 40 years service by your retirement age, you can top up your pension through buying back years. This means buying back missing years of service by lump sum or a regular payment which would be a percentage of your salary.
You can buy back years in the following two scenarios:
- Purchase of Previous Actual Service
This is where you can purchase years that you have actually worked but did not pay into the superannuation scheme. Such purchase of years may be applied to years of part-time service. This option provides excellent value for employees and costs less than the other option listed below.
- Purchase of Notional Service
This is where you can purchase years that you did not actually work. i.e. “notional years. Notional Service may be purchased by regular deduction from salary or by payment of lump sum. This is usually a very expensive option, it is rarely cost effective or advisable to avail of this option.
The supplementary pension may form part of the pension paid to Class A PRSI payers. The combined amount of your Employer pension plus the supplementary pension benefit should equal the amount a Class D person receives in their pension.
A supplementary pension may be payable by your Employer when you retire if:
- You are not employed in any capacity paying PRSI contributions, including self-employment.
- You are not entitled to the following social welfare benefits or qualify for less than the maximum benefit due to circumstances outside of your control;
- Jobseeker’s Benefit
- Illness Benefit
- Invalidity Pension
- Contributory State Pension.
Difference between an A1 or a D1 Class Employee A1 Class Employee
A1 Class Employee
Public Sector workers who commenced work after 1st April 1995 are classed as A1 PRSI payers. These employees pay a higher PRSI rate than a D1 employee. They are however entitled to extra benefits as a result
- They are also entitled to a State pension (€12,131 per annum)
- They are entitled to State illness benefit 0f (€9776) after your sick pay entitlements cease with your job.
- They get unemployment benefit if the need arises up until their 66th
- They are entitled to a free dental check up each year
- They are entitled to a free appointment with an Eye specialist
D1 Class Employee
Public Sector workers who commenced work before 1st April 1995 are classed as D1 PRSI payers. They are not entitled to any state pension, illness benefit or unemployment benefit but do get a slightly larger pension on retirement.
Payslip Analysis – Deductions Explained:
There are numerous types of deductions taken from your gross salary on a fortnightly/monthly basis. You will see these deductions on the right-hand side of your payslip. The following deductions are compulsory and are related to your pension and death in service benefits.
- Pensions grouped
- 1.5% SP & CH (spouses’ and children)
- PRD (Pension Related Deduction)
In total these deductions equate to around 14-15% of your total gross pay.
Other common deductions include:
- Cornmarket Group – This is group income protection premiums
- Cornmarket Variable – This is life cover/serious illness premium as part of the group income protection policy.
- AVC – these are AVC premiums
- Credit Union – This is usually a loan repayment
- INTO/ASTI – These are trade union membership fees.
Retirement Process Explained
Retiring from your job can be a stressful and life changing decision. There are a lot of decisions to be made in order to tax efficiently drawdown your pension/AVC etc. This is why we have created a step by step process to make this part of your life as stress free as possible. Below is an info-graphic of the steps involved in this retirement process. If you are nearing retirement and would like some expert advice so that you can make the best decisions in relation to your retirement – we would be delighted to help.
Steps involved in retiring the most tax efficient way:
- Do you know how to maximise your tax relief and how you can lower the amount of tax you pay?
- If you have a public and private sector pension, do you know which one you should draw down first on retirement to ensure that you are not paying more tax than you have to?
- Is your private sector and public sector income protected in the event of your death or illness?
- Would it be beneficial for you to form a company for your private sector income?
- Would this benefit you and your family?
- Are you maximising the tax relief available to you?
- Are you planning for your future in the most tax efficient way possible?
- Are you leaving a legacy or an inheritance tax bill?
- Have you made a will?
We help all our clients answer their questions and ensure that they and their families are able to live their desired lifestyle without the fear of ever running out of money.
We help you plan today for the life you want tomorrow…
Services we provide:
- Income Protection.
- Life Cover/Mortgage Protection.
- Serious Illness Cover/Cancer Cover.
- Pensions / Personal Pensions / Pensions Buy Out Bonds / Group Pensions / Company Pensions.
- Savings / Children’s Education Savings Plan / Regular Savings Plan.
- Investments/ Lump sum Investments.
- Inheritance Tax Planning.