AVC strategy for couple on different tax brackets

[daswerr]

Hi all,

I plan to start maxing out my pension contributions into my occupational pension scheme to 20% (Revenue limit for my age). It look me too long to understand that I have been missing out on the 40% tax relief, but better late than never I suppose.

However I am unsure whether my husband should do the same, i.e. pay 20% (Revenue limit) of his 24k gross salary into his occupational pension scheme (€2.4k) and then claim tax relief at only 20% (€480 tax relief).

I'm wondering whether it is possible to claim tax relief on our total combined AVCs at the higher 40% bracket, i.e. Since our combined income is 86k and combined AVC would be €14.8k (12.4k mine + 2.4k his), can we claim 40% of €14.8k back?

If that's not possible, would it still be worth it if the tax relief on my husband's contributions are only 20%?


Some background:

I'm 31, salary 62k, currently paying 5% into my occupational pension scheme, which is matched by my employer.

My husband is also 31, salary 24k, currently paying 6% into his employer's occupational pension scheme, which is matched.

Our house is mortgage free, 100k in savings, no debts, our finances are combined and we are jointly assessed. We don't have or want children and our lifestyle is relatively frugal, so we end up saving most of what we earn.

Our goal is early retirement from full time work at age 50 (or whatever the minimum age will be by then). The plan is to take the 25% tax free lump sum and then minimum withdrawals on the remaining 75% so that income tax is kept at the lower bratcket.

Any thoughts would be much appreciated

 

[Monton]

A key factor for you is that (with tax credits and allowances) a married couple don't go on the 40% rate of tax until they earn more that €70,600. So a couple with a double income and jointly assessed for tax (that basically means one person takes responsibility for submitting tax returns for both) are generally taxed at 20% rate up to a threshold of €70,600 (provided the lower income exceeds €26,300) The 40% tax rate kicks in for income above that threshold.

In 2021, the standard rate cut-off point for a married couple or civil partners is €44,300. If both are working, this amount is increased by the lower of the following:
- €26,300 or
- The amount of the income of the spouse or civil partner with the smaller income

That seems to fit in with your planning to extract the maximum benefit of tax relief on the amount you both are paying at 40% (the amount between the standard rate and your current double income of €86k). I am sure your AVC provider will take this into account.

You get full tax relief at higher rate for all contribution to AVCs. So that means if you are on the higher rate of tax (40%) for a portion of your incomes and you make an AVC contribution of say €50 each pay cheque, in reality it only costs you €30 - the tax relief portion contributes the remaining amount to the AVC pot.
Its both tax efficient and good planning for retirement!

 

[RedOnion]

A key factor for you is that (with tax credits and allowances) a married couple don't go on the 40% rate of tax until they earn more that €70,600. So a couple with a double income and jointly assessed for tax (that basically means one person takes responsibility for submitting tax returns for both) are taxed at 20% rate up to a threshold of €70,600. The 40% tax rate kicks in for income above that

You realise that's not entirely correct in the circumstances of the poster, as one earner is in an income less than 26,300

 

[Monton]

Thank you Red Onion for pointing that out.
I have amended the point.
In 2021, the standard rate cut-off point for a married couple or civil partners is €44,300. If both are working, this amount is increased by the lower of the following:
- €26,300 or
- The amount of the income of the spouse or civil partner with the smaller income, if it is less than €26,300

 

[RedOnion]

@Monton
Perfect. So we're back to the situation as outlined in opening post:

Higher earner gets 40% relief on their contributions.
Lower earner gets 20% relief.

Does it make sense for the lower earner to contribute, beyond the amount that is matched by employer?

@daswerr
Personally, I think this comes down to what your income will be in retirement.

You will each have your individual tax bands & reliefs in retirement, so there's no point putting all the income into 1 name. But it depends on what other income you'll have.

Typically, if no other income in retirement, someone getting 20% relief will be paying 0% in retirement.
Someone getting 40% relief will be paying 20%, or 40%.

 

[NoRegretsCoyote]

If that's not possible, would it still be worth it if the tax relief on my husband's contributions are only 20%?

I don't think pension contributions without tax relief should be taboo. It depends on your circumstances and goals.

You are young, but aspire toward 30 years of pension income in just 20 years time. One of you has a pretty low income.

For this plan to work you will need a high return. So an all-equities strategy certainly makes more sense than keeping €100k in cash.

Otherwise retiring from all employment at 50 means no more Class A PRSI contributions so you won't qualify for a full contributory pension at 67 or whenever. Be careful to think this though fully.


If I was your age again I would tell myself that kids were the best investment I made, but this is not for everyone

 

[Monton]

I need to add that my post is based on the view that the married couple are jointly assessed for tax to maximise the tax breaks and are taking a combined view of AVC contributions.

When both spouses are working, it is important and advantageous that married couples/civil partners opt for Joint Assessment for tax purposes.
This is automatically given by Revenue when you notify them of your marriage. Joint assessment is the option that benefits most couples as tax is chargeable on the combined total income.
- A key advantage of joint assessment is that any other tax credits that remain unused by one spouse, may be claimed by the other spouse.
- Just one person - the assessable spouse or nominated civil partner is responsible for filing tax returns and paying any tax due.

Because one person in this case has a lower income it will be important that the contribution to AVCs takes account of the tax implications and the couple have a combined approach, to maximise the relief for AVC contributions at the 40% rate.

 

[Monton]

If I was your age again I would tell myself that kids were the best investment I made, but this is not for everyone

I am not sure if having children would be regarded in the financial world as an astute investment. Having had the expeience I know now, they were the most expensive investment I ever made. A report a few years ago in the Irish Time says it costs half a million to rear two children to age 25.
Studies also show that family financial transfers flow mainly from ageing parents to their adult children.

However, I do agree that as they mature the return on investment is immense. I think as we age we realise the benefits of having a child are happiness and a sense of purpose in life. We are also told that investing in the youngest among us produces significant economic and social benefits with rates of return that are comparable to the high return on stocks over the long run. I think as we age we realise the benefits of having a child are happiness and they also provide a sense of purpose in life. Kids and teenagers bring their own version of stress to a parent’s life. But there’s really nothing like seeing the world through a child’s eyes or laughing with your kids over a joke only you understand. Over time, this can and does reduce the amount of money you need to spend on other “stuff” to make you happy.

 

[RedOnion]

Because one person in this case has a lower income it will be important that the contribution to AVCs takes account of the tax implications and the couple have a combined approach, to maximise the relief for AVC contributions at the 40% rate.

You seem to have missed the question.

The high earner is already maximising their contribution.

The question is (as a jointly assessed couple) is there any point in the lower earner contributing, and receiving only 20% relief.