2 basic pensions questions

[harza]

Three quick pensions questions:

1) for a single individual with €34k at standard rate (20%).
Does it matter if you earning €35k or €135k in order to claim pension relief all at the marginal rate (42%)?

2) is there any advantage/disadvantage to the 2 options of paying AVCs either a) monthly or b) as a lump sum each year before the 31 October deadline?
years time.

3) Are AVCs the best use of surplus income? I have not yet taken out a mortgage but would like to do so in, say, the next 2 years

 

[ClubMan]

Three quick pensions questions:

1) for a single individual with €34k at standard rate (20%).
Does it matter if you earning €35k or €135k in order to claim pension relief all at the marginal rate (42%)?

You mean 41% unless you are referring to last year? You can only claim 41% relief on income that you have paid 41% tax on. If in the course of claiming relief you are effectively pulled back into the 20% bracket then you will only get 20% relief on the balance. I'm not sure that I'm explaining this very well! Note that if you make pension contributions out of net pay then as well as claiming tax relief you can claim PRSI relief - see the key posts about doing this on a PRSA (same applies to other pension categories).

2) is there any advantage/disadvantage to the 2 options of paying AVCs either a) monthly or b) as a lump sum each year before the 31 October deadline?

Paying monthly may be better from a € cost averaging point of view. Also if you make contributions regularly then you can get tax relief on an ongoing basis through your tax credits rather than having to claim lump sums each time. PRSI relief must still be claimed separately unless the contributions are via payroll.

3) Are AVCs the best use of surplus income? I have not yet taken out a mortgage but would like to do so in, say, the next 2 years

You said 2 questions! Impossible to say whether or not AVCs are the best use of surplus income without reference to the individual's specific circumstances etc. If you are planning to buy a home soon then maybe you would be better off saving towards that first?

 

[harza]

Thanks ClubMan,

In summary...

*To claim full benefit of marginal relief at 41% you need to be earning a minimum of €40k (assuming employee aged under 30 years) i.e. €40k * 15% = €6k
€40k - €6k = €34k (point at which rate moves from standard to marginal)

*Cost averaging aside, the main difference between monthly and lump sum AVC contributions is that you need to reclaim PRSI on the lump sum option.

 

[ClubMan]

*To claim full benefit of marginal relief at 41% you need to be earning a minimum of €40k (assuming employee aged under 30 years) i.e. €40k * 15% = €6k
€40k - €6k = €34k (point at which rate moves from standard to marginal)

I think that's about right. But remember that getting 20% relief on income that you have paid 20% tax is full relief too! And don't forget PRSI relief.

*Cost averaging aside, the main difference between monthly and lump sum AVC contributions is that you need to reclaim PRSI on the lump sum option.

No - with monthly contributions Revenue will grant you tax relief via tax credits. I don't think that they will do this for annual lump sum contributions for which you may have to claim tax relief manually. In both cases you must claim PRSI relief manually after you have obtained tax relief.

 

[harza]

No - with monthly contributions Revenue will grant you tax relief via tax credits. I don't think that they will do this for annual lump sum contributions for which you may have to claim tax relief manually. In both cases you must claim PRSI relief manually after you have obtained tax relief.

To clarify... there is no financial difference between the two options?

 

[MMilken]

No financial difference (besides potential effect of timing of lump-sum versus monthly).