Wednesday 22 November 2017

Can I get a refund of the pension levy if I leave my new job in the public sector?

'The employee contributions to the public service pension will be subject to tax at 20pc and this will be deducted automatically before you receive your refund'
'The employee contributions to the public service pension will be subject to tax at 20pc and this will be deducted automatically before you receive your refund'

Gerry Stewart Partner with Fagan & Partners

I recently took up work in the public service but as it isn't really working out for me and I am considering going back into the private sector.

I was hit with the public sector pension levy when I took up the new job. I've been in that public service job now for about a year and-a-half.

I understand I can get a refund of the pension levy if I leave within two years of starting my public service job? Is that right?

And how would I go about getting that refund?

Clodagh, Westport, Co Mayo

You are correct. You are entitled to a refund of any employee contributions paid - plus a refund of any 'pension levy' deductions. The employee contributions to the public service pension will be subject to tax at 20pc and this will be deducted automatically before you receive your refund.

You can claim this refund by liaising with the human resources department of your public sector employer.

I have a small director's pension which I took out when working as a contractor many years ago. I am no longer contributing to that pension.

I started work in the public sector about 10 years ago and have a pension there, into which I am contributing. I paid about €20,000 in contributions to the director's pension and every year administration fees eat into the value of that pension.

At the same time, I think it would cost me money to move that pension.

What can I do with that director's pension now to stop losing so much money on it - and to stop seeing its value being eroded so much over time? Would I be better off just cashing it in?

Steve, Ballsbridge, Dublin 4

It is important to highlight that the private pension levy may also have contributed to the erosion of your director's pension. In 2014, this levy was 0.75pc; in 2015, the levy was reduced to 0.15pc. The good news is that it was announced in the recent Budget that this levy will be abolished.

We will answer your questions in reverse. You cannot "cash in" your pension - however you may be able to access it, depending on your age and your work circumstances.

Pensions normally have a specific retirement age and this is typically age 60 or 65 - but sometimes later. Most directors' pensions can be accessed from the age of 50 onwards.

When you access your pension, you should be entitled to a tax-free lump sum and/or a pension. The tax-free lump sum and/or pension are known as retirement benefits and these will be determined by the rules of your director's pension scheme.

You can, and should, take immediate control of your director's pension to ensure that it starts to grow in value. This can be done by moving it - and by reviewing your investments.

As you say, you could consider moving your pension from the current provider and this may or may not cost you money. You could move it to a pension provider who may charge you lower administration fees than you are currently paying - and this may save you money in the long run.

The investments your pension is in should also be considered. The ability of the value of your pension fund to grow rather than fall will be determined by a few factors.

If the administration fees (and pension levy) are eroding the fund, then you are most likely in a low-risk fund or a fund that is not performing. You should review your funds regularly with an independent financial adviser.

You should also complete an attitude-to-risk questionnaire, which the pension company or your adviser can provide you with. In simple terms, this will show you how much risk (if any) you would tolerate for your pension investment.

You could then consider moving some or all the pension assets from the existing low-risk or non-performing fund to a fund or funds that offer better growth potential - particularly over the remaining term you have to retirement.

Most pension companies allow you to switch funds at no extra cost. You should check this with your pension provider.

I work in the public sector and it would be more beneficial for me to use the best three years of salary - rather than the salary for my last three working years - for calculating my final pension figure (given recent reductions in pay).

Is it possible for me to use my best three years salary when calculating my pensionable remuneration?

Gerry, Trim, Co Meath

There are a number of ways to determine the "best final salary" figure when calculating your final allowable tax-free lump sum pension figure. The technical or Revenue Commissioners' term is final remuneration - and you will see more in-depth rules about this on Revenue's website (www.revenue.ie).

To keep it as simple as we can (and ignoring some of these rules and technical terms), your final salary or remuneration figure can be the higher of your pay over any 12-month period in the last five years; the average of total pay over three or more consecutive years (ending not earlier than 10 years before your retirement date); or the basic pay at your retirement date (or any date within the year ending on your retirement date).

If you are using either of the first two options, each year's pay may be increased in proportion to the increase in cost of living from the last day of the year used - up to your retirement date. This is often referred to as 'dynamisation'.

The second option (that is, the average of total pay over three or more consecutive years) is very common, especially because many public sector workers were on higher salaries prior to the Croke Park and Haddington Road agreements with the unions.

Let's look at someone who is on €30,000 today. They may have been on a salary of €31,000 in 2006, €31,500 in 2007 and €32,000 in 2008. If we ignore the cost of living increases for this example, the average of three (or more) consecutive salaries would be €31,500.

This is higher than the current €30,000 so the maximum allowable salary for calculating the pension tax-free lump sum is higher than today's €30,000 salary.

Remember the cost-of-living increases which we ignored in the example could also increase these figures.

It is important to note that your pension award will be based on the current salary to determine the "final pension figure"- however, you can use existing additional voluntary contributions (AVCs - pension top ups) or buy last minute AVC's to supplement your lump sum or pension and bring them up to the maximum allowed by Revenue.

Email your questions to lmcbride@independent.ie or write to 'Your Questions, The Sunday Independent Business Section, 27-32 Talbot Street, Dublin 1'.

While we will endeavour to place your questions with the most appropriate expert to answer your query, this column is a reader service and is not intended to replace professional advice.

Sunday Indo Business

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