Contributing more than 150% to AVC for 40% tax payer

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Retirement is within the next five years with a DB pension, 20+ years of service and having contributed AVCs to allow a retirement lump sum of 150% of revenue max limit and in 40% tax bracket. I'm wondering if there is any financial benefit in continued investment in AVCs? Just matching company 4% at the minute.
Thanks in advance.
 
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Conan

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The max retirement lump sum is 150% of Final Salary (inclusive of any BIK, bonuses etc) provided you have at least 20 years service. So using an AVC pot to top up what the scheme provides to the 150% figure makes sense, very tax-effective.
 

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Thanks for your prompt reply Conan. I assume that the Final Salary figure from the P60 (gross pay less any superannuation contributions allowable for income tax purposes) will include declared BIK, bonuses etc. So there is no financial benefit in my continued AVC payments to match the employers 4%?
 
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Conan

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Certainly investing AVCs to maximize the retirement lump sum is very tax effective. I am not clear on the 4%+4%. If you are in a DB scheme are you saying that the Employer will match your 4% AVC as an additional contribution to a DC scheme? This seems unusual.
Whilst it is arguable that you should contribute AVCs to fund additional Pension income (as opposed to only contributing to maximize the lump sum) if that additional pension income is going to be taxed at 40% + 4% USC, if you are saying that the Employer WILL match that 4% into an additional DC scheme, then it may be worthwhile investing the 4% AVC in order to get the additional 4% from the Employer.
But you need to clarify whether the potential 4% from the Employer is in addition to what it contributes to the DB scheme?
 

Chancer

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Not sure if this the right thread or whatever to ask in but;
I'm in an occupational DB scheme and I've worked up the maximum 40 years service which entitles me to 1.5xfinal salary (about 90K). I've also got about 100K in AVCs.
1) Can I take the full AVC balance tax free in a lump when I retire as the total lump sum will be less than 200K?
Or
2) Is the AVC fund like a separate DC fund and I can only take 25% of its value as a tax free lump sum?
Or
3) Can I only take 1.5x final salary as a tax free lump sum?

I've been able to find revenue stuff about "Excess lump sums" where lump sum taken is > 200K, but I cant find anything about "excess lump sums" where the lump sum is > 1.5xannual salary but less than 200k. It certainly seems that an occup pens scheme has to give lump sums <=1.5 final salary for the scheme to remain revenue-approved, but it's not clear that the total amount an individual in an occupational scheme can get in total pension lumps is 1.5xfinal salary or 200k whichever is the lesser.
What if I left my current employment and started a 3rd fund, and ended up retiring for some reason, at half my current annual pay, (say 30K) would my tax free lump sum from all 3 pensions be restricted to 1.5x30k = 45K? Doesn't seem likely????

Basically what Im asking is; Is the max tax free lump sum 200K plain and simple, or could it be less depending on exactly what your final salary, or years at work, were?
 

Bladerunner

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Basically what Im asking is; Is the max tax free lump sum 200K plain and simple, or could it be less depending on exactly what your final salary, or years at work, were?
[/QUOTE]
Just curious as similar to my own circumstances if there is answer or advice on this question
 

Fergal19

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your getting confused between max lump sum and the taxation of it. The max lump sum is 1.5 times salary of which 200k is the max tax free. the balance will be taxable.

Suppose salary is 200k. That would give a max lump sum of 300k. Of this amount is 200k is tax free and the balance of 100k will be taxed at 20% so net lump sum will be 280k.
 

Bladerunner

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Suppose the salary was 60k. 1.5 times of this is 90k assuming full service. Can an AVC be used to fund the difference between 90k and 200k.
 

Fergal19

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No. the max is 90k in your example. Assuming scheme pays you full 90 your AVC's would be transferred to an ARF
 

Fergal19

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You should check if there is a difference between pensionable salary and total remuneration. If there is then you could take the extra lump sum from the AVC.
 

SBarrett

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Suppose the salary was 60k. 1.5 times of this is 90k assuming full service. Can an AVC be used to fund the difference between 90k and 200k.
As Fergal has said, if you are using the percentage of salary method of calculating your tax free lump sum, it is precisely that, based on your final salary and years service. If you go this route, you must purchase an annuity with the remainder.

To confuse the matter, say you are on €60,000 and have a pension pot of €800,000 at retirement. In that scenario, you have the option of taking 25% of the value of the pot ie €200,000 tax free. The remainder must be invested in an ARF.

And remember, the maximum tax free lump sum is €200,000. An additional €300,000 can be taken with a once off tax rate of 20%.


Steven
www.bluewaterfp.ie
 

moneymakeover

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That only confuses me more

Before your post I assumed the max lump sum was

Lesser of(1.5 times final salary, 25% total fund)

But now your saying I can take 25% regardless of salary if I choose annuity?
 

Conan

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Assuming you are in a DC scheme, you can take a lump sum of either:
- 25% of Fund, or
- 150% of Salary
In many cases maximizing the lump sum (tax free up to €200,000) may be the most tax effective strategy. But if that is the 150% of Salary, then you must buy an Annuity with the remaining Fund (if any).
If you go the 25% of Fund route, then you can either buy an Annuity, invest in an ARF or a mix of both.
Also worth mentioning that if the 150% exhausts the fund, then so be it. Remember that any funds used to but an income (ARF or Annuity) will potentially be taxable, whereas the lump sum up to €200,000 is tax-free.
 

moneymakeover

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Charteredaccountants.Ie

Tax-free lump sum: the maximum tax-free lump sum that can be taken on retirement is 25% of the value of the fund in the year of payment. This is subject to a lifetime limit of €200,000. Any excess pension lump sum over €200,000 will be subject to income tax with the next €300,000 taxed at 20% and the balance taxed at 48% (40% income tax and 8% USC). If you are a member of an occupational pension scheme, you can take a tax-free lump sum based on your salary and service with the employer up to a maximum of 1.5 times your salary (subject to the overall maximum of €200,000).
 

moneymakeover

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I still don't see where it says you MUST take an annuity


Tax
Tax on lump sums at retirement
The first €200,000 of pension lump sums payable is currently (2016) tax free. This is a total lifetime limit even if lump sums are taken at different times and from different pension arrangements. Lump sums between €200,001 and €500,000 are taxed at 20%, with any balance over this amount taxed at your marginal rate and subject to the Universal Social Charge.
The amount of cash you can take out of a pension arrangement is limited, with different rules applying depending on the type of arrangement you have.
For RACs, PRSAs and people transferring to AMRF/ARFs at retirement, the cash limit is 25% of the retirement fund.
The amount of cash you can get from an occupational pension scheme at normal retirement age is broadly 1.5 times your Final Remuneration, if you have completed 20 years’ service and have no benefits from a previous scheme
 

Conan

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It’s Revenue practice. See Revenue Pensions Manual. Your excerpt purely deals with how the lump sum might be calculated.
 

Fergal19

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that document doesn't deal with retirement pension options. It just deals with the taxation of lump sums at retirement. This is where the confusion lies.

On retirement from an occupational scheme you get two options as follows:
1) Annuity Option
2) ARF Option

The lump sum is calculated differently in each case as follows:

1) Max 150% of salary and balance must buy an annuity
2) 25% Lump sum and transfer to an ARF
 

Sarenco

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Quick question -

If somebody joins the public service mid-career and already has private pension savings can that amount be used as a lump sum on retirement?
 

Fergal19

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You can only use AVC's for that purpose on retirement. Your previous pension benefits are also retained benefits and can't be transferred to the public service scheme.

You should check the rules of the scheme just in case.
 
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