Continue contributions to AVC or freeze accumulated fund until retirement?

Hi all,
I work in the public service and can retire now on full pension entitlements (Feb 2016). I took out an AVC eighteen months ago to the maximum limit allowed under revenue rules to augment additional tax-free lump sum allowable under my pension scheme on my retirement.

AVC commenced: Aug. 2014.
€16800 lump sum investment.
Thereafter-monthly contributions: €923
Total gross contributions €33900
Current net value of fund €30950

Charges: 0.6% Gov. levy, 5% charges, 1% management fee.

However I now intend to continue working for up to the next 2 to 3 years and have the following questions regarding my options:

· Should I continue paying into the AVC even though I have reached the target of my initial tax efficient savings goal?

· Should I discontinue contributions now and draw down value of AVC with pension lump sum on my retirement?

· I understood (mistakenly apparently) that all contributions to the AVC were to lowest risk cash funds. However I have now just become aware that funds were invested in gilts also which accounts for losses over “cash only funds” of €680 approx. My question here being is it unusual that an AVC fund taken out for such a short (18 months, my intention on commencement was to retire at the end of this period) time frame with the sole purpose of increasing tax free retirement lump sum would include gilts, instead of a cash only fund?
I am mortgage free and have no outstanding debts apart from car loan.

Hi

There are limits on the maximum pension pot that you may have, so it would be a good idea to find out how close you are to that maximum pot. Are you making your contributions through Cornmarket? If so, get them to do the calculations for you. For all their faults (and they have many), they have great systems in place for helping calculate the maximums you can contribute to pensions.

On the funds, it is likely that you went into a lifestyling fund that is geared towards annuity purchase. Annuity rates are based on long term bond rates, so the lifestyling fund reduces the equity exposure and aims to replicate bond rates as you near retirement. You can switch to cash if you want, you are not stuck with your initial choice.

Steven
www.bluewaterfp.ie

Thanks very much for your reply Steven.
I am making contributions through Irish Pensions & Finance and with their assistance maximised the pot to the levels allowed in my case. So the sum accumulated is the max I can draw down tax free on retirment. Is there any point in continuing contributions towards an annual retirment fund or whatever over the next 2 years, or would the short period of time and management charges etc. negate benefit.

The most tax efficient use of AVC's is to bridge any shortfall between the Revenue max retirement lump sum and whatever lump sum the Pension Scheme will pay. If effect you get tax relief (at up to 40%) on the way in and get it all back (hopefully) tax free when you retire. If you do this on the run-in to retirement then it is a very good deal. BUT, you need to check the numbers. So if when you retire you are getting full service benefits (based say on 40 years service), you need to be sure that there is a gap to be bridged???
Investing AVC's beyond funding for a lump sum shortfall, is questionable. There is no tax advantage if you are going to be a top rate tax payer in retirement - i.e. 40% relief on contributions but 40% +USC on any additional pension income.
So yes, do maximise your tax-free lump sum, but beyond that its probably not worthwhile (unless you will drop to a 20% tax rate in retirement).
Finally, if investing for additional tax-free lump sum over a short period I would only invest in a Cash Fund. Any other fund involves some investment risk which makes little sense sine the tax-relief represents you real (best) investment return.

Thanks Conan.

Clear,concise & understandable.