Contributing AVCs when retired

Discussion in 'Pensions' started by Pieface, 10 Jan 2019.

  1. Pieface

    Pieface Registered User

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    Hi,
    When I retire, I expect to have surplus cash every month from my state pension and defined benefit pension. I will also have an ARF (from current AVC contribution) which I don’t intend to draw from (ideally). Can I use this surplus cash to contribute to AVCs? If yes, do this AVCs go straight into the ARF? There is a 4% notional income from ARFs that is subjected to income tax annually. I will be on the 40% income tax bracket when I retire. As AVC contributions get tax relief, I am wondering if I can lower my income tax by continuing to contribute to AVCs? I am not where the AVCs get contributed to - ARF or ?
     
  2. Conan

    Conan Frequent Poster

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    853
    No.
    You can only make tax-deductible pension contributions (AVCs) out of “earned income” such as salary from employment or being self employed. If your only income after you “retire” is pension money (from DB scheme, from Social Welfare, from ARF) these don’t qualify as “earned income”.
     
    MugsGame likes this.
  3. SBarrett

    SBarrett Frequent Poster

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    ...also, AVC's are pension contributions linked to your employment. If you are not employed, you cannot contribute to AVCs. You can make a lump sum payment before you retire though, so maybe you can get tax relief that way and reduce your overall tax liability.


    Steven
    www.bluewaterfp.ie
     
    MugsGame likes this.
  4. Pieface

    Pieface Registered User

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    29
    I know there is a maximum AVC amount based on age that gets tax relief. Does this mean that that is the max amount that can be contributed to AVCs?
    Can I contribute above this limit? I don’t think so but I thought I better check.

    @Stephen, the lump sum payment is restricted to this max percentage based on age even when close to retirement?
     
  5. Conan

    Conan Frequent Poster

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    There are limits to the amount of AVCs that can benefit from tax relief. If over age 60, that limit is 40% of Salary each year. You can contribute more, but it may not benefit from tax relief, which would not be a sensible strategy.
    In terms of lump sum AVCs (often called “last minute AVC”) you could invest a lump sum prior to retirement and if that exceeds 40% of Salary in the last year, any excess over the 40% can be spread back into last year and a refund of tax can be applied for. But you can only backdate into the last tax year.
    So if you were retiring in say Dec 2019, then a lump sum invested in say Nov 2019 could initially be set against your 2019 tax bill. Any excess could be spread back into 2018 (again subject to the 40% limit).
    AVCs can be a very tax effective investment strategy particularly where the AVC fund is being established in order to maximize the tax-free retirement lump sum. So tax relief on the contributions and getting the AVC back as an additional tax-free lump sum on retirement (because the main scheme is not providing the Revenue maximum, perhaps due to short service).
     
  6. Pieface

    Pieface Registered User

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    Thanks Conan. Can you please expand on why contributing AVCs above tax relief limit is not a sensible strategy?
     
  7. Conan

    Conan Frequent Poster

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    If you are not getting tax relief on the contributions but the resulting extra pension income is going to be subject to Income Tax, it makes no sense.
    If you have surplus funds above the 40% , you are better investing such in a way where only the interest/dividends/growth is taxable, not the capital itself.
     
  8. Pieface

    Pieface Registered User

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    29
    If i contribute AVCs above tax relief in one year, how many years can I carry it forward to use the tax relief of following years? I am trying find an equity fund for some surplus cash and wish to avoid ETFs and unit linked funds. By putting the money into AVCs eve n if above tax relief limits i am hoping to benefit from compounding growth by putting the money to work earlier.
     
  9. Conan

    Conan Frequent Poster

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    Any excess (over tax relief limits) can be carried forward into future years so long as you can continue to offset them against “earned income”. You cannot offset any excess against pension income in retirement.