AVCs and retirement age

M

Martin Corrigan

Registered User
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I'm 54 and currently funding an AVC with Irish Life Consensus Fund which today is worth €156,000. Calculating on contributions of €15,600 per year for the next 6 years at 4% growth per year, I'm hoping to break the €300,000 barrier by the time I'm sixty. First question - is that a reasonable goal?

Secondly, I'm in an occupational pension scheme with a defined benefit, state guaranteed, of €6,000 per year after 34 years service, which I will qualify for when I turn sixty. So, the question is, what kind of extra -- ie, above and beyond the €6,000 -- would it be reasonable to hope for from the AVC at age 60, assuming a pot of €300,000? The key element I'm wondering about here is the age, 60. That's young to cash an AVC and I'm wondering if an annuity of about 3% or € 9,000 per year (or in the alternative, taking a €75,000 lump sum and €6,750 per year) is realistic. Any opinions?
 
Firstly, the AVC pot must be used st the same time as you access the Mainz Employer scheme.
Do I understand that you expect to receive a pension of €6,000 pa after 34 years service (seems very low)? Is there any tax free lump sum from the occupational pension scheme?
If you expect an AVC pot of €300,000, I would suggest that it might be used as followed:
- firstly use to maximize your tax free lump sum from the occupational pension scheme (up to 150% of Salary). You don’t have the option of taking 25% - €75,000 - as a lump sum.
- balance can be used to buy an Annuity or invest in an ARF

It’s not clear whether you are an A Class or B/D Class PRSI. If A Class then you will also get a State Retirement Pension (hopefully) at age 68 ( by then the State Pension age will be 68). If B/D then you do not qualify for a State Pension.

If you buy an Annuity with some or all of the €300,000 then an Annuity rate of circa 3% is a reasonable assumption.

It is generally advisable to maximize your tax free lump sum ( because its TAX FREE). Any pension income is potentially taxable, but if your total income is less than €18,000 pa (currently) then you won’t pay Income Tax (or €36,000 if married).
 
Your projections/assumptions don't look particularly unreasonable but the dispersion of market returns over a period as short as six years can be pretty dramatic.

If I was in your shoes, I would start gradually de-risking your AVC portfolio (perhaps directing new contributions to cash and/or bonds).

Working a few more years (if possible) would make a big difference.
 
If you're assuming a projected growth rate of 4% per year for the next six years, then you could also consider a return of 4% per year on an Approved Retirement Fund (ARF) after retirement for your AVCs, after taking your tax-free lump sum. Conan mentions this in his post above. Let's say charges reduce the annual return on your ARF by 1% per year so you're getting 3% growth on average. If you withdraw an income of 4% per year from the ARF, then the value of it will reduce very slowly and it will almost certainly outlive you. An annuity dies with you. That said, while your ARF may grow by 4% per year on average, some years it won't and your income will eat a bigger chunk out of your capital. And some years it will grow by more. An ARF carries more risk and uncertainty than an annuity, but if you're willing and able to accept this, you could end up with the same level of income as the annuity and still have a legacy to leave behind you after you die. Such decisions don't have to be made until you retire and will need to take account of your own personal circumstances.
 
Thank you for your answers. Given the choice, I would prefer to work on past sixty and keep contributing to my pension, but my wife is a UK national who will, as time goes by, need to be closer to the British NHS for medical reasons. I'm aiming to come out of my present employment at age sixty, but by that time Brexit will have happened and even assuming I could find a job in the UK, a) it wouldn't be half as good or pensionable as my present job here and b) it's not even clear if the Irish will be allowed to work in Britain after they "take back control". For these reasons, it's necessary for me to have as good an income as possible in place by age sixty. If I can bank up a pot of 300,000 before that time, then if it becomes necessary, I'm hoping for an income of about 3% a year. I'm not obliged to take my pension at sixty, but depending on circumstances, I may have to.
 
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