PS employee, should I overpay AVC's?

[Lamps]

Hi folks, looking for some adcice. I am a 38 year old PS employee in the PS 14 years now, so on the pre 2013 pension scheme.

My house is paid off and I've no debts so I've extra cash now that I want to put to good use. I plan to retire at 60, which would leave me with 35/40 years service, so I believe there is scope to pay into an PRSA AVC to cover the 5/40 year shortfall shortfall on my lump sum at retirement. This won't be that big a sum and only a small enough AVC contribution over the years would cover that.

Am I right in thinking its still a good idea to pay more into my AVC if I can, as the money I would be putting in would be taxed at 40% anyway, and if I pay it into my AVC I get the benefit of that compounding each year at 5-10%. Then when I retire I should be paying the lower tax band when withdrawing it through an ARF?

Considering my options and from my research this seems a reasonable approach?

 

[Dave Vanian]

Then when I retire I should be paying the lower tax band when withdrawing it through an ARF?

That's a crucial point. Be as sure as you can be that you will be on the lower tax rate in retirement when you take into account all taxable income at that time, e.g. main scheme pension, any rental or dividend income (if applicable), spouse's pension or salary (if applicable), State pensions...

If you're sure you'll be on the lower rate of tax then your logic is spot on.

 

[bstop]

Even if some or all of your ARF income is to be taxed at 40% it can still be a good long term investment. This is because all the investment gains made by your AVCs are tax free. If you opt for a high risk high return fund for your AVCs they could give you a good return.

 

[NoRegretsCoyote]

If you're sure you'll be on the lower rate of tax then your logic is spot on.

I think it's very hard to know - a quarter of a century out - what the personal income tax schedule will look like! Also the likely level of state pension and occupational pension is very hard to know.

For the OP I think the key objective is being able to reliably bridge the income gap between retirement at 60 and occupational pension starting at 65.

 

[Dave Vanian]

I think it's very hard to know - a quarter of a century out - what the personal income tax schedule will look like! Also the likely level of state pension and occupational pension is very hard to know.

Good point. I should amend my reply to suggest that the OP should do the best they can to figure out if they will be on the higher or lower rate of tax in retirement, bearing in mind that none of us know what taxes or State pensions will be like in 25 years' time. Perhaps the estimation will be simple. If the OP is single, has no other taxable income outside of the work pension and the estimators show that the pensions will be comfortably below €36,000 per year from all sources, then you could reasonably make an assumption of lower-rate tax in retirement. On the other hand, if the OP has substantial rental income and/or perhaps a spouse with a high salary and a high pension entitlement, then an assumption of higher-rate tax in retirement would be reasonable.

I suspect a majority would fall into the awkward middle ground where it's not so clear-cut. If so, then I guess AVCs sufficient to max out the lump sum and then fund a pension between 60 and 65 would be the starting point and perhaps a review of circumstances when that has been achieved.

 

[OMG_OMG]

My other half is PS.
She was maxing out AVCs for a few years and has €250k in AVCs now.
She was advised to stop when someone more financially literate than us had a look at the finances.
She is currently on €76k.
I could adjust what i draw down in retirement to massage when we enter the higher tax band. but it turns out that we cant just add the 2 incomes together.
If she is over the single limit by herself then anything over that is in the high bracket.
Perhaps im not explaining that very well

 

[Conan]

If she is a member of the pre-1995 scheme (the traditional Defined Benefit scheme), then the most tax efficient use of AVCs is to maximise the retirement lump sum (eg where she has less than 40 years service) or possibly where you know that your total income in retirement will be at the lower tax rate (currently 20%).
Investing AVCs, some of which will have to be used to provide an additional pension income in retirement is not a particularly tax effective strategy if that additional income will be taxable at 40% plus USC (so 40% relief on the contributions but possibly 44.5% tax on the resulting income).