Teacher early retirement, query lump sum, tax situation?

[casio]

The figures below have been rounded off.
Gross average salary: €76,000
Currently have €11,000 in AVC
Service 33years (EDIT: age 55)
Department have given the following details, based on retirement date of 31st. August: Lump sum €94,000
Buyback PCW (including 15months I was not in superannuation) = €7,700


I want to lodge further AVC lump sum so that I can retire with tax free lump sum of 1.5 times salary circa €114,000.

If €7,700 is paid out of existing AVC to cover PCW buyback, how much more do I need to fund in order that I retire with tax free lump sum circa €114,000?
What is the tax situation regarding the payment of the €7,700 and the additional AVC amount?

Another option is to have the €7,700 deducted from the lump sum and leave €11,000 in AVC as is, again what are the tax implications for this option?

 

[oysterman]

You can get full tax relief on the once-off AVC contribution you'll need to make and you can set this off against both 2009 and 2010 income. You could carry forward any unused relief into next year but, based on your age and the modest size of the contribution you need to make, you'll get it all away over the 2 years - this is to your advantage since you'll have been a higher rate payer but are unlikely to be next year based on what we know about you.

Looks like you need c.€28k total AVC fund to get you the €114k lump - so you'll need to contribute c.€17k.

Don't quite get your last question since you'd end up nearly €30k short of your desired maximum tax free lump sum.

 

[casio]

Many thanks for the advice.

Another option is to have the €7,700 deducted from the lump sum and leave €11,000 in AVC as is, again what are the tax implications for this option?

What I meant by this was to have the €7,700 deducted from the lump sum which leaves €86,300, draw down the €11,000 in AVC as an addition to the tax free lump sum and put in a further €16,700 needed as the additional AVC. This corresponds with your figure of an additional c.17k.

Can I claim back the tax at c. 45.9% on the €7,700 (which was deducted from lump sum) and also tax at c.45.9% on the additional €16,700?

Are the two options effectively the same for tax purposes?

If I go with the first option of having the 7,700 deducted from the AVC, leaving my lump sum from dept. at 94k + 3,300 AVC , make further AVC of c.17k, am I allowed to get back the tax on 7,700 at 45.9% + 17k at 45.9%?

 

[oysterman]

Can I claim back the tax at c. 45.9% on the €7,700 (which was deducted from lump sum) and also tax at c.45.9% on the additional €16,700?

You won't get any tax back on the deduction from the lump sum because there is no tax liability on the lump sum in the first place.

It's the additional money you put in to your AVC (the €17k) that the tax relief is gained on.

 

[Squaremile]

Yes Casio, both options are effectively the same for tax relief purposes. You would get tax relief on the deduction of the PCW bill from your lump sum as this is a compulsory bill. In this situation though it would be easier to use the money in your AVC fund as you will have already had tax relief on those contributions.

Your revenue maximum lump sum is €114,000
Your actual lump sum is €94,000
You require €20,000 in your AVC fund to top up the lump sum
Your AVC fund is currently €11,000
You elect to pay the PCW bill out of AVC so balance of the AVC is €11,000-€7,700 = €3,300
Therefore you need to make up the difference of €20,000-€3,300 = €16,700 to top up your lump sum (as Oysterman pointed out).

You will get tax relief of 41% and PRSI relief of 4.9% on this contribution if you avail of this in 2010 (for which you have enough scope).

Best wishes,
Andrew (squaremile.ie)