Career average defined benefit pension query

Player_86

Hello,

Apologies if this has been done to death, but I would really appreciate a steer on a pensions-related query.

My wife (age 35) has been offered a job with a salary of €105,000 and a career average defined benefit pension. She currently earns a salary of €95,000 plus a pension contribution of 5% from her employer. We are trying (with great difficulty) to work out the implications for her pension. Broadly, we understand from reading up on it that career average DB pension schemes are far less valuable than final salary DB pension schemes, but it would be good to know if our calculations below make sense to people, or if there is anything screamingly obvious we are missing.

If we assume retirement at 65 and, just to keep things really simple, no inflation (either in her salary or the State pension) for next 30 years, we come up with the following:

Lump sum would be (30 years)(3/80) of career average salary = 90/80 of €105,000 = €118,125.

Pension would be (30 years)(1/80) of net salary* = 30/80 of (€105,000 minus €26,000) = 30/80 of €79,000 = €29,625pa.

On top of €29,625pa, she would receive the State contributory pension of circa €13k, meaning total pension of €42,625pa. We are not entirely clear whether she would get the State pension on top of the €29,625pa, but the fact that the pension is calculated by reference to net salary seems to suggest that she would. The pensions booklet we got from the employer is difficult to decipher on this point.

*Net salary means gross salary minus twice the top rate of contributory State pension.

Does this sound broadly correct or are we missing something really obvious in our calculations? Any suggestions or observations welcome.

Thanks very much in advance.

Geuze

This is a PS pension.

Your calculations look correct.

Your calculations look correct for the previous PS pension, the final salary scheme.

You are assuming here that the worker earns 105k each and every year for 30 years.

So average salary is 105k, okay.

I have not checked the benefits calculations in the new Single PS scheme, but what you type looks correct.


I can tell you that yes, the State Pension is on top of the work pension.

As you have done, the gross salary is reduced by twice the State Pension to adjust for this.

Player_86

Thanks very much for your response, Geuze.

Rothmans

Hi OP, is your wife public sector or private sector. If she is going into the public sector, your calculations are being a bit optimistic I'm afraid.

Player_86

Rothmans wrote: »

Hi OP, is your wife public sector or private sector. If she is going into the public sector, your calculations are being a bit optimistic I'm afraid.

Hi Rothmans,

Thanks very much for your response. The job offer is in the public sector. May I ask why the calculations are optimistic? What have we missed or not factored in?

Thanks again.

cee_jay

There is estimator tool here:
https://singlepensionscheme.gov.ie/for-members/scheme-information/single-scheme-estimator-tool/

Mrs OBumble

Player_86 wrote: »

Hi Rothmans,

Thanks very much for your response. The job offer is in the public sector. May I ask why the calculations are optimistic? What have we missed or not factored in?

Thanks again.

If she is not already public sector, then the state pension is not additional. Very different rules for new entrants now.

kippy

Mrs OBumble wrote: »

If she is not already public sector, then the state pension is not additional. Very different rules for new entrants now.

The COAP is part of the final pension and not in addition to it for all post 1995 entrants to the public sector as pointed out by Mrs OBumble.
I assume your wife's current contribution is 5 percent. You will also that that contribution increase if she takes up the offer.

Player_86

Mrs OBumble wrote: »

If she is not already public sector, then the state pension is not additional. Very different rules for new entrants now.

Thanks very much for the reply.

I think I have already factored that into my calculations if you look closely. In calculating the pension, I have used the net salary, which means gross salary minus twice the top rate of contributory State pension.

So long as you use the net salary to calculate the pension, you then add the State pension to the figure, as I understand it.

The lump sum calculation is different - you use the gross salary for that calculation.

I stand to be corrected, of course.

Player_86

kippy wrote: »

The COAP is part of the final pension and not in addition to it for all post 1995 entrants to the public sector as pointed out by Mrs OBumble.
I assume your wife's current contribution is 5 percent. You will also that that contribution increase if she takes up the offer.

Thanks a lot, Kippy. Very good point re the current contribution.

Again, as per my comment above, I think I am actually correct on the old age pension point, as I have already factored it into my calculations by using net salary rather than gross salary.

Player_86

cee_jay wrote: »

There is estimator tool here:
https://singlepensionscheme.gov.ie/for-members/scheme-information/single-scheme-estimator-tool/

Very useful, cee_jay, thanks. Funnily enough, it shows my calculations as correct (give or take a few euro), but doesn't explicitly answer the question of whether she would receive both the single scheme pension amount and the State pension! They're both listed in the Estimate Benefits on Retirement section so I would assume she would.

pemtca

Yes she will receive both. It's an integrated scheme.

kippy

Player_86 wrote: »

Very useful, cee_jay, thanks. Funnily enough, it shows my calculations as correct (give or take a few euro), but doesn't explicitly answer the question of whether she would receive both the single scheme pension amount and the State pension! They're both listed in the Estimate Benefits on Retirement section so I would assume she would.

The calculation outlined the figures from the COAP however they are part of the overall pension.
Based on the calculator your wife would expect to get an overall occupational pension of €45,000 Gross which encompasses both the COAP and the occupational pension. (which is close to what you've worked out) (Based on the assumptions built into the calculator.
For that she would be contributiong €8,500 gross of her salary this year for the occupational portion of the pension and the usual hard to know for the COAP.

Player_86

Thanks all - much appreciated.

Rothmans

Apologies for the delay in responding. I was going to refer you to the online calculator, but that has been linked above. You seemed to be basing you calculations one on the old scheme rather than the post 2012 scheme. If it works out similar that's great news. I suspect it's because your wife is a relative high earner and once your salary goes over a certain amount (maybe 45 k I'm not sure) you're contributions (and therefore future pension) increase significantly.

However, 65 (or 40 years service) was considered retirement age on the old scheme. On the new scheme, 68 is retirement age, and to retired at 65 her pension would have to be actuarially reduced to reflect this. Also, she won't receive the OAP until she hits 68. Also important to bear in mind that that proportion of her pension is not set in stone. It could be reduced significantly by the time she retires.

Player_86

Rothmans wrote: »

Apologies for the delay in responding. I was going to refer you to the online calculator, but that has been linked above. You seemed to be basing you calculations one on the old scheme rather than the post 2012 scheme. If it works out similar that's great news. I suspect it's because your wife is a relative high earner and once your salary goes over a certain amount (maybe 45 k I'm not sure) you're contributions (and therefore future pension) increase significantly.

However, 65 (or 40 years service) was considered retirement age on the old scheme. On the new scheme, 68 is retirement age, and to retired at 65 her pension would have to be actuarially reduced to reflect this. Also, she won't receive the OAP until she hits 68. Also important to bear in mind that that proportion of her pension is not set in stone. It could be reduced significantly by the time she retires.

Thanks very much, Rothmans. Very good points re the retirement age and, if she retires at 65, the gap between that and receiving the OAP. I hadn't thought of that.

I wasn't entirely sure what you meant by the suggestion that I have based my calculations off the old scheme. I assume you mean the pre-2013 scheme? I'm not familiar with that scheme and I followed the worked examples in the pension booklet. We are both fairly gobsmacked by the amount of the additional superannuation contribution and the impact of that on take home pay, but I think my calculations on the pension are correct and are based on the (post-2012) booklet she was provided with.

Thanks again in any event.

Rothmans

Player_86 wrote: »

Thanks very much, Rothmans. Very good points re the retirement age and, if she retires at 65, the gap between that and receiving the OAP. I hadn't thought of that.

I wasn't entirely sure what you meant by the suggestion that I have based my calculations off the old scheme. I assume you mean the pre-2013 scheme? I'm not familiar with that scheme and I followed the worked examples in the pension booklet. We are both fairly gobsmacked by the amount of the additional superannuation contribution and the impact of that on take home pay, but I think my calculations on the pension are correct and are based on the (post-2012) booklet she was provided with.

Thanks again in any event.

Is that booklet available online by any chance. It would be handy to have.

Before the the online calculator, I calculated out what my pension would be based on how it is prescribed in the Single Scheme Act 2012 (I think sections 18 and 19 will be relevant yo your wife). My calculations corresponded to what the calculator spits out. When I use the calculation that you have been provided with it overestimates my benefits.

Every year I get what is called an Annual Benefits Statement. It outlines the total amount I have contributed to my pensions thus far and how much I contributed in the previous year. It also tells my the value of benefit I have worked up each year in respect of my annuity (entitled 'referrable amount earned towards your annual retirement pension') and how much I have contributed to my lump sum (entitled 'referrable amount earned towards your once off lump sum').

These referrable amounts are very handy and show you exactly how much your pension is worth, and give you an accurate picture of how far you have to go to reach your preferred retirement income.

The problem with this new scheme is that the minimum retirement age has been increased to 68. So if you want to retire before that, it might be advisable to set up an AVC. I've done so myself in recent years. What spurred me to do so was that I have a mandatory retirement age of 60, but the scheme integrates the occupational pension into the OAP. This creates a big problem for those of us who have mandatory retirement age below 68, as the Act has actually made no provision to bridge the gap between retirement and entitlement to the OAP. The old scheme had what was known as a 'supplementary pension' which addressed any mis-match between retirement and entitlement to the OAP. Unfortunately, they haven't addressed this in the Single Scheme.

I've set up an AVC fund which I am already contributing aggressively towards. It has been a real eye opener and I have completely reevaluated how I view my pension and retirement. Continuing to contribute at my current rate I'll be able to retire at 55 and live comfortably. The majority of my income will be coming from my private pension rather than my occupational pension though, and that is key to my plan.

wench

Player_86 wrote: »

I wasn't entirely sure what you meant by the suggestion that I have based my calculations off the old scheme. I assume you mean the pre-2013 scheme?

The calculations you've presented are done in the style of the old pensions, whereby you accumulated service at 1/80 each year, and then multiply it by the salary to get the pension amount.


Now each year you calculate a "referable amount" which goes towards your final pension, and then these are summed together (after some inflation adjustments)


You should still be in the right ballpark, provided you don't have a big variation in salary across your service.