Advice re AVC's for a 57 yr old who will get a small pension from the HSE.

[McDreamy]

Hi there,
I am hoping for a second opinion re my mam's pension.
She is 57 working for the health service and has been advised to put money into an AVC to benefit from the tax relief because of her age etc.
She will get a small pension from the HSE, will get the state contributory pension and is looking to possibly invest in AVC's. She already invests in AVC but is not investing the max.

This is what she's been advised:

You are already saving €222.79 per fortnight (€5812.59 pa).
Therefore for last year and the first 6 months of this year you are allowed to pay a lump sum to an AVC of €10,578.25 for last year and €5289.12 for the 1st 6 months of this year. Total Euro 15,867.37. You will then get back from revenue a cheque of €7,563.27.
This means that you would have savings in your AVC of €15, 867 as well as getting your tax back of €7,563.27
Starting from July you can continue your AVC contribution of €222.79 per fortnight and if you pay an additional monthly premium in to your AVC where you saved the lump sum of €405.45 per fortnight it would actually only reduce your take home pay by i.e cost you €206 per fortnight. This is the maximum you would be allowed to pay in.
At age 60 you will then be in the position to pay in a lump sum again and or increase your contributions but this we can look at when the time comes.

If we assume that you pay in the lump sum of €15,867 now and continue your payments per fortnight at the amount of €405.45 to age 63 you would have saved close to €79,000 and it would have only cost you €38,000
That is a clear profit of €41,000. and thats not taking into account any increase in payment or additional lump sum payments.

Does this make sense? Is there any catches she should be aware of? Is it a wise move? What questions should we ask?

Many thanks

 

[LDFerguson]

What does your Mam want to achieve with her AVCs? Additional pension? Additional tax-free lump sum? Both? Retire early?

If she is simply looking to increase her pension and lump sum at retirement, she should consider the Notional Service Purchase scheme ("buying back years"). Have a look at some of the key posts here on that subject.

If she just wants to increase her tax-free lump sum at retirement, or fund for an early retirement, AVCs may be appropriate.

If she does want to consider AVCs, she should find out exactly what the charges are and what type of fund(s) she will invest in. She should have a clear understanding of, and be happy with both before she signs up.

www.ferga.com

 

[round1]

You should be aware that AVC schemes are based on stock market performance and have done very badly in the past year or so due to stock market collapse. A lot of people in the Public Service have stopped paying into their AVC scheme due to the very large losses they have incurred in their funds.
You dont say when your mother hopes to retire but it could be quite a few
years before recovery takes place in these type of funds.
Even though you get tax relief on AVC contributions you pay tax when you start to draw on the funds so if the fund dosn't grow you dont gain .

At this stage your mother should get a full statement from her AVC provider to find out how her fund has performed (ie gained or lost)and how secure is the fund. If her fund is not secure she should consider switching to a secure one especially if she is considering retiring at 60.

At the present time buying notional years would seem a more secure option but may be expensive at her age. However it may be possible to buy notional years using what has accumulated in the AVC fund. This is another thing to ask the provider about. Ask lots of questions before committing to anything.

Hope this is some help.

 

[McDreamy]

Thanks for both of your responses. She is planning to retire in 3 years at 60. She is meeting the financial advisor on Wed and now knows what questions to ask. She is looking at AVC's for the tax savings really but buying back years might be a better option. It's all so complex. Thanks again

 

[television]

Thanks for both of your responses. She is planning to retire in 3 years at 60. She is meeting the financial advisor on Wed and now knows what questions to ask. She is looking at AVC's for the tax savings really but buying back years might be a better option. It's all so complex. Thanks again

A financial advisor or an AVC sales person?

 

[Slim]

If she is simply looking to increase her pension and lump sum at retirement, she should consider the Notional Service Purchase scheme ("buying back years"). Have a look at some of the key posts here on that subject.

Notional Service Scheme is very expensive and you would need to live a long time after retirement to gain any benefit. Surely she can ensure that any additional AVC Contributions are invested in conservative funds, i.e. cash etc?