Access pension from old employment to max contributions to pension with new employer?

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needsomeinfo

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I'm 54.
I have a pension from a previous job with approx 400k.
If that is accessible since I am over 50 would this scenario be beneficial to me?
Mortgage (tracker) has about 85K outstanding. I recently increased payments so, it would clear in about 6 years.
I have another pension with my current job.
If I accessed some of the pension from the previous job to clear the mortgage now and then maxed out my AVCs into my new pension would the tax free element of AVCs mean that there was a net benefit?
Any downsides to this?
 
This is a somewhat complicated question to answer.

You can indeed take up to 25% of the fund as a tax-free lump sum, now. You'd put the remaining 75% into an Approved Retirement Fund (ARF). So you pay off the mortgage. You can then replace the monthly mortgage repayment with an AVC and "gross it up" to account for tax relief. (Example - let's say you're currently paying €600 per month on your mortgage and are a higher-rate taxpayer. You could instead pay €1,000 per month into an AVC which would cost you a net €600 after tax relief at 40%.) So far, so good.

Next job is to establish how much tax you'll pay on withdrawing the AVCs when you retire. If you can withdraw all the AVCs as a supplement to your tax-free lump sum at retirement, thus withdrawing them tax-free, then it's a no-brainer. You get 40% tax relief on the way in and pay zero tax when you take them back out.

At the other end of the scale, if you will be paying tax at 40% in retirement and will be paying 40% tax on the majority of the AVCs as you take them back out post retirement, then it's not as attractive.

A key point will be to establish how you can withdraw the AVCs at retirement and importantly how much tax you'll be paying then.

Regards,

Liam
www.FergA.com
 
A very interesting question.

The mortgage is a distraction, so the question can be boiled down to:

Should you take €100k out of a pension fund tax free, so that you can contribute €170k to a pension fund?

Let's assume that you can later withdraw €42k (25% of €170k) tax-free and €76k after tax (127k - 40% tax) = €118k.

This appears to work, subject to the following assumptions:
  1. You can get 40% tax relief on the €170k contributions
  2. You can 25% of the €170k tax-free
  3. The tax rules don't change for the worse
And, as Liam points out, if you pay less than 40% tax on the €127k, then it's even better.

Brendan
 
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LDFerguson said:
If you can withdraw all the AVCs as a supplement to your tax-free lump sum at retirement, thus withdrawing them tax-free, then it's a no-brainer. You get 40% tax relief on the way in and pay zero tax when you take them back out.
Click to expand...

Hi Liam

I don't get this.

In what situation could the €170k be tax-free on retirement?

Is it likely given that he has not been too long in his job?

Brendan
 
If you can max your contributions without withdrawing the €100k, then you should not withdraw the €100k. It is better left there growing tax-free.

You also have to be able to get 40% tax-relief on €170k of pension contributions over the next few years.

You are aged 54, so from when you are 55, you can contribute up to 35% a year of €115k or €40k

But if you are earning over €115k, you can probably afford to contribute €20k gross anyway (net cost €12k), so cashing in your pension only increases your allowable tax contributions by €20k a year until you are aged 60.

It would take 8 years to use up the €12k net additional contributions per year.

Brendan
 
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Brendan Burgess said:
This appears to work, subject to the following assumptions:
  1. You can get 40% tax relief on the €170k contributions
  2. You can 25% of the €170k tax-free
  3. The tax rules don't change for the worse
Click to expand...
I think it makes a lot of sense to withdraw from the old fund to max AVCs up to tax-relieved thresholds.

I wouldn't pay off the tracker early. Carrying debt at ECB+margin to invest in tax-free equities is a good bet over the long term as the return will almost certainly be more than the cost of borrowing.
 
If you get a tax free amount of €100k from the old scheme, then that only leaves a further €100k tax free from your current scheme (based on current €200k limit). So you need to consider what will be the estimated fund value from your current scheme and to what extent AVCs will add to that.
Also consider that any retirement lump sum in excess of €200k is currently taxable at 20%. So if you get tax relief on the AVC at 40% it may still be worthwhile.
 
If I understand it correctly, and I find it hard to keep up with all the pension rules,

You can withdraw up to 25% of €800k tax-free on retirement.
You pay 20% tax on the next €500k of a lump-sum.

So maybe it does work.

Brendan
 
Brendan Burgess said:
In what situation could the €170k be tax-free on retirement?
Click to expand...

If s/he's in a DB scheme / Public Service scheme and on a high salary, using the "salary and service" method of calculating the tax-free lump sum instead of the "25% of fund" method.

(I wasn't initially thinking about recycling the entire €100,000 into AVCs but rather paying off the mortgage and recycling the monthly repayments into AVCs instead.)

Even if all the AVCs cannot be withdrawn using this method of calculating, if a substantial part of them can and the balance will only be taxed at 20% then it still makes great sense.

Brendan Burgess said:
Is it likely given that he has not been too long in his job?
Click to expand...

Where is it said that s/he's not been too long in the current job?
 
Hi Original Poster

Could you provide the actual figures so we can arrive at a more definite conclusion. It's a very interesting case study.

Length of service with current employer:
Current salary :
How much gross can you afford at present to contribute to a pension fund:
Value of pension fund with current employer - assuming it's a defined contribution scheme:
 
LDFerguson said:
Where is it said that s/he's not been too long in the current job?
Click to expand...

Well Watson.

She has €400k in her pension fund from the old job.
She is aged 54 now.

I am guessing that she is probably around 10 years in her current job. I very much doubt that she is 30 years in it.

Brendan
 
You may well be right, but even if she's 14 years in the current job, that will give her 25 years' service if she retires at 65. If she's on a high salary when she retires, that could be enough to clear out all or most of the AVCs in the lump sum.

But I suppose we need to wait with bated breath for her to respond.
 
"He"

Length of service with current employer: 3 years
Current salary : 120K plus 15% bonus
How much gross can you afford at present to contribute to a pension fund: Not sure. I already have AVCs and if I went this route I would no longer have mortgage payments - Approx 800/month topped up with a further 400
Value of pension fund with current employer - assuming it's a defined contribution scheme: 50K
 
The mortgage payment issue is a distraction which makes the issue more complicated.

How much AVCs are you making at the moment? With a salary of €140k, you can probably afford to contribute most of the €40k gross maximum or €24k net at the moment.

So I don't think it's worth cashing out a pension fund which is accumulating tax-free to supplement the very small shortfall you might have below the maximum pension contribution allowed.

Brendan
 
needsomeinfo said:
Mortgage (tracker) has about 85K outstanding. I recently increased payments so, it would clear in about 6 years.
Click to expand...

Just noticed that now. You should stop the increased payments and maximise your pension contributions instead.

That is a better solution than cashing your pension to allow you to maximise your pension contributions.

Brendan
 
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