Looking for advice on AVC contributions

[SeaWorld]

After several years of procrastination, I am going to start contributing to an AVC and would appreciate advice from the many experts here. I may be including more information than necessary but thought it best to explain why I want to use the AVC to fund for a lump sum only. As you can see below, I will have three pensions as things stand so I don't want the hassle of a fourth after I retire.

I am a public servant and have just turned 59. I don't have a retirement date in mind but it could be as early as 60. My "normal" retirement date is 65.

I won't have a full public service pension as I didn't join until my mid 30s. I am not interested in buying years of service as it's too expensive.

I intend to maximise contributions to a UK State Pension. That is in hand.

I will be entitled to a contributory pension from the Irish State.

My salary by the time I retire will be at least €70,000 per annum.

When I retire, I would like to take the AVC proceeds as a lump sum thereby forgoing the lump sum option on my employer pension from which I would opt for a monthly pension only. Is that possible?

If I were to retire before 65 I wouldn't necessarily need to take the lump sum at that time (financially speaking) so I would be happy to leave the AVC fund to grow for a while longer. Is that possible?

I envisage making a lump sum AVC contribution for the last tax year and starting up regular AVC contributions also. I am prepared to make sizeable contributions but am concerned I might build up a sum that would exceed the maximum lump sum I will be allowed to draw down on retirement. I really want to keep the AVC for that purpose only. Can anybody advise what that maximum lump sum figure might be so I can work out how much to contribute?

Thanks in advance for any guidance you can provide.

 

[AAAContributor]

Are you in any sector-specific scheme?

Assuming the following:
- Joined public sector scheme mid-30s (let's say age 35)
- Member of the pre April 2004 integrated scheme (can retire from age 60 with no actuarial reductions)
- No entitlement to Professional Added Years or buyback of years
- Benefits from Public Sector Scheme: Lump sum = Yrs service x final salary x 3/80, Pension = Yrs service x (final salary - [2 x State Pension[) x 1/80

When I retire, I would like to take the AVC proceeds as a lump sum thereby forgoing the lump sum option on my employer pension from which I would opt for a monthly pension only. Is that possible?

I'm assuming you mean "retire at age 65" here. The answer is no. When you retire you will receive a lump sum from the public sector scheme and an annual pension. You cannot opt to not take the lump sum for an increased pension (which is what I presume you are talking about here if I've understood you correctly). Any AVCs can be used to bridge any gap between the lump sum payable from the public sector scheme and the Revenue maximum lump sum allowed, but must be matured at the same time.

If I were to retire before 65 I wouldn't necessarily need to take the lump sum at that time (financially speaking) so I would be happy to leave the AVC fund to grow for a while longer. Is that possible?

No. The AVCs have to be taken at the same time as the retirement benefits from the public sector scheme and you would presumably be using them to maximise your tax free lump sum.

I am prepared to make sizeable contributions but am concerned I might build up a sum that would exceed the maximum lump sum I will be allowed to draw down on retirement.

Most advisers will calculate your scope for AVCs within Revenue maximum limits.

Can anybody advise what that maximum lump sum figure might be so I can work out how much to contribute?

In very broad terms assuming retirement at age 65 with 30 years service:

Lump sum entitlement from public sector scheme = 30 x €70,000 x 3/80 = €78,750

Potential Revenue maximum = €70,000 x 120/80 = €105,000

Potential scope for AVCs = €26,250

If you retire earlier than age 65, there'll be a larger gap between the lump sum receivable from the scheme and the maximum allowed and so you'll have more scope for AVC funding in that scenario.

 

[SeaWorld]

Thank you so much for your very detailed response, it is hugely helpful and very much appreciated. I have a follow up question if you would be kind enough to advise further. Please see below comments in bold.


Your assumptions are correct, except perhaps the last one - see below.



I haven't decided on a retirement date yet, so we can't assume 65. Perhaps it's irrelevant for the purposes of this question though.

I may not understand the underlying "fine print" here. My pension scheme allows for two options on retirement, either Pension Only or (Reduced) Pension and Lump Sum. I was hoping to take the pension from the employer and lump sum from AVCs. Is this not permitted? i.e. if you want to take a lump sum at retirement it has to come from the employer scheme? Is this a Revenue rule?

 

[Protocol]

Up until recently, I presumed that all PS pension schemes offer:

lump-sum + pension

However, I recently discovered a PS pension scheme which gives staff a choice about the lump-sum.

The other option is zero lump-sum, and a pension based on 1/60 accrual, not 1/80.






It seems you are in a scheme like that?

 

[SeaWorld]

Up until recently, I presumed that all PS pension schemes offer:

lump-sum + pension

However, I recently discovered a PS pension scheme which gives staff a choice about the lump-sum.

The other option is zero lump-sum, and a pension based on 1/60 accrual, not 1/80.


View attachment 8564



It seems you are in a scheme like that?

That's it exactly. I have the forecast calculator for my pension scheme open here in front of me and my options are as follows:

 

[Protocol]

OK.
You are suggesting that this choice has implications for the possibility / scope to do AVCs.

I would have to think more about that.

Other posters will know more than me.

 

[AAAContributor]

My pension scheme allows for two options on retirement, either Pension Only or (Reduced) Pension and Lump Sum. I was hoping to take the pension from the employer and lump sum from AVCs. Is this not permitted? i.e. if you want to take a lump sum at retirement it has to come from the employer scheme? Is this a Revenue rule?

Thanks for that. It looks like your pension scheme gives you the choice. I hadn't seen that in the public sector before. Are you at liberty to say what area of the public sector this is?

As for scope for funding AVCs, I wonder does the original analysis still stand?

At the point of retirement your scheme gives you a choice to take:
- a lump sum + pension, or
- pension only.

We know that at the point of retirement, whatever age that is, your lump sum from the public scheme can reasonably be estimated as €X.

If you were to elect for the pension only, de facto, you are taking a lump sum from the scheme, albeit in the form of a higher annual pension.

My guess (and this is all it is) is that from an AVC funding point of view, as of this point in time, you'd fund for: Revenue Max less €X.

 

[SeaWorld]

When I retire, I would like to take the AVC proceeds as a lump sum thereby forgoing the lump sum option on my employer pension from which I would opt for a monthly pension only. Is that possible?

I do apologise for not being clearer about the pension options available to me in my OP, I referenced it in my paragraph above but can see now it's not terribly clear. I incorrectly assumed that all public service pension schemes would have those options. I am in the Higher Education Sector.

 

[AAAContributor]

This presentation to NUIG by New Ireland (see slide 17) seems to suggest if you go for the higher 60ths pension, you can fund using AVCs for the full lump sum and not for the difference as I outlined above.

 

[Dave Vanian]

Most of the work we do is with private sector pension schemes and I'm just not familiar with a public sector scheme that allows you an option NOT to take the lump sum from the scheme. But we do see that occasionally with private sector DB pension schemes. In those circumstances, if the amount of pension being forfeited from the DB scheme for a lump sum is too much, then an AVC works well. Assuming no upper limits are being breached, you can fund an AVC just to provide a tax-free lump sum at retirement without touching the pension from the DB scheme.

 

[SeaWorld]

This presentation to NUIG by New Ireland (see slide 17) seems to suggest if you go for the higher 60ths pension, you can fund using AVCs for the full lump sum and not for the difference as I outlined above.

Thank you, that slide seems to cover it alright.

 

[SeaWorld]

Most of the work we do is with private sector pension schemes and I'm just not familiar with a public sector scheme that allows you an option NOT to take the lump sum from the scheme. But we do see that occasionally with private sector DB pension schemes. In those circumstances, if the amount of pension being forfeited from the DB scheme for a lump sum is too much, then an AVC works well. Assuming no upper limits are being breached, you can fund an AVC just to provide a tax-free lump sum at retirement without touching the pension from the DB scheme.

Thank you for this. Do you know if I could draw down the AVC lump sum at a later stage than the occupational pension? Say retire at 60 or 61 and take the pension but leave the AVC to grow for a another few years?

If I were to retire before 65 I wouldn't necessarily need to take the lump sum at that time (financially speaking) so I would be happy to leave the AVC fund to grow for a while longer. Is that possible?

 

[Dave Vanian]

Thank you for this. Do you know if I could draw down the AVC lump sum at a later stage than the occupational pension? Say retire at 60 or 61 and take the pension but leave the AVC to grow for a another few years?

No. You must draw down the AVC funds at the same time as the main pension scheme benefits. I've seen it happen that people forget to send back AVC retirement forms and in doing so buy themselves a few weeks or months, but strictly speaking, the answer is No.