Considering AVCs in final 2/3years of service

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lotus

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My mum has 38 years pensionable service in the public service. She plans to retire in 2/3 years, maybe a little longer depending on strains of job, health etc. She has no mortgage and has no debt.

She is considering saving/investing circa €1000 euro a month for her remaining years of work. She could save/invest more if she thought she would make good gains.

We have had a look at some of the key posts in this area. Does it make better financial sence for her to recycle her intended monthly savings through AVCs as opposed to putting it in a deposit account or into equities funds? From our reading, it appears she would be able to put up to 30% of her salary (net I presume?) through AVCs.

If she put money through AVCs for the next few years, how could she access it at retirement. It appears if she tries to draw it down as a lump sum, she would pay tax at her marginal rate and thus this would wipe out the gains she would make. What would be the most astute, tax efficient way of drawing down this money?


Cornmarket seem to have a link with her profession and provide services in this area. Are there better/more cost effective options?
She is considering contacting a financial advisor for advice. Can anyone recommmend one?

All comments/advice appreciated
 
Hi Lotus.. your Mum could invest up to 30% of her gross salary as an AVC and get full relief at her marginal tax rate. This could be done either through her work scheme or via a PRSA. I'd stick with low risk cash type investments so close to retirement. There is plenty of useful advice in this forum but if you are at all in doubt consult a Qualified Financial Adviser.
 
If your Mum has 38 years' service I'm guessing she's over 55. If so, her limit for pension contributions is 35%, inclusive of any contributions she's already making. If she's over 60 her limit is 40%.

It's a somewhat complicated area and the specifics of her existing scheme benefits need to be examined carefully, but she will probably be permitted to withdraw a portion of her AVC fund as a tax-free lump sum. With the balance, she will probably be able to buy an annuity (guaranteed pension for life) or invest in an Approved Retirement Fund from which she can draw an income that she specifies. Any annuity income or ARF withdrawals will be subject to Income Tax. What rate of tax she will pay on them will depend on her total income position and tax credits at that time. She might only be only on the 20% rate at that time.

A Cornmarket AVC has the advantage that it will be deducted from her salary, thus qualifying for immediate tax and PRSI relief. But I understand they charge a fee and commission. If she goes to another broker to start her AVC, she may get a better deal on charges / fees. She will have to claim her tax and PRSI relief.

Liam D. Ferguson
www.ferga.com
 
Liam is being polite. You will not read a good word about Cornmarket on this site (please search). She should go for a fee-based broker and ensure she pays no more than 0% commission and 1% management charge - particularly because she is intending to put large amounts into her AVC.
 
She can also offset the pension contributions against last years income provided it is done before 31 oct.
 
Thanks for replies lads.

My mum is 58. She will get a gratuity on retirement of 1.5 times her salary (based on average salary over last 3 years). Does this mean if she sets up an AVC she would not be able to take any of the money (lump sum) from AVC at retirement without incurring tax as she will get a tax free lump sum through her work pension anyway?

In relation to annuitys or approved retirement funds.......Where can one buy these? I presume she would not have to worry about them until closer to retirement? Through whom can you buy into these schemes?

Am I right in thinking she could then draw from her annuity or ARF gradually trying to ensure she stays on the lower tax band?

Thanks again for the replies..........very informative and helpful
 
Not 100% certain on how public pension operate.

As your mother works in the public service she will receive a pension of 40/80 or half her salary. If she takes a certain amount in lump sum she foregoes a certain amount of her annual pension.

So she could build up a fund by way of AVC up to a max of 1.5 times her salary and take this tax free and leave her pension at 40/80 or take part 1.5 times her salary which is part funded by AVCs and a reduced pension.

She needs to find out how much her pension is reduced by annually for every euro in lump sum received. Normally a figure of approx 10:1 (for every 10 euro received in lump sum pension is reduced by 1 euro annually)
The HR section union or trustees of the scheme should be able to help. This is how it works in the private sector different rules may apply to public sector.

Hope this makes sense?
 
Public Sector would usually provide a pension of n/80 AND a tax-free lump-sum of (3 * n)/80.

The lump-sum does not affect the pension (usually) in public sector.

The lump-sum may be augmentable if it is based on a salary that is in some way lower than final remumeration...so the AVC could fund any shortfall.
 
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