Contributions to Pension Plan in excess of tax relieved Value?

[Carrolll1000]

Hi There,

Does anyone know if you can make contributions to your Occupational Pension Fund in excess of the yearly tax relieved value?

I am wondering if this could be away, to hold investments, in a safe place, where you don’t have to pay management fees (my company pay the management fees) and that do not attracted CGT or income tax?

If this is possible, please advise what the cons would be?

Thanks for your help.

 

[Clamball]

I have made some additional AVC’s to my 2021 tax return. Revenue say I have made ~3K more than is permitted for 2021 and that figure will carry forward to 2022. So it seems they acknowledge the overpayment but will allow the money stay in the AVC fund but only apply the PRSI etc refund in 2022 year end tax assessment.

Now, I am pretty sure I did not make an error, but am in correspondence with revenue about it. However if I did overpay deliberately or accidentally they will apply the figure in the following year.

Now, revenue think I made an error, but if you put say 75% of you salary into an AVC instead of the maximum allowed for you age then revenue might take an different approach if they thought you were trying to deliberately investing more than allowed.

 

[Gordon Gekko]

It’s not for Revenue to “allow” or “disallow”. You can put as much as you want into the fund. Anything over the limits carries forward and eats into the limits for subsequent years.

The “risk” is that your income dries up and you’ve nothing to get relief against.

 

[Sarenco]

So it seems they acknowledge the overpayment but will allow the money stay in the AVC fund but only apply the PRSI etc refund in 2022 year end tax

There is no relief from PRSI for pension contributions.

As Gordon says, you can contribute whatever you want to your pension fund - Revenue has no say in the matter.

However, it rarely makes sense to contribute over and above the maximum tax-relieved limits, baring in mind that any drawdowns are subject to income tax, plus USC, plus PRSI (pre-the year you turn 66).

 

[Zenith63]

I tried with a Zurich Executive Pension a couple of months ago, I was told Revenue are ‘tightening up on it’ so Zurich would only allow me contribute to the tax relieved limits for 2021 and 2022. I didn’t push it though.

 

[Brendan Burgess]

I was told Revenue are ‘tightening up on it’ so Zurich would only allow me contribute to the tax relieved limits for 2021 and 2022.

Quite likely that someone is attributing their own policy to Revenue.

It probably makes sense for the insurance company to impose the limit because, as Sarenco points out, it's usually incorrect to exceed the limit.

And the insurance company might face a claim from the customer at some later stage. The customer would be unlikely to win, but it would use up a lot of resources explaining it to the Ombudsman.

Brendan

 

[jasdpace@gmail.]

As Gordon says, you can contribute whatever you want to your pension fund - Revenue has no say in the matter.

This is simply not what the Revenue Manual says, per below.

3.7 Limits on contributions Employee contributions must be restricted, if necessary, to ensure that the member's aggregate benefits are within approvable limits and that the employer makes a meaningful contribution to the scheme (see Chapter 4.1). A funding review and maximum benefits test must take place before any Additional Voluntary Contribution (AVC - see definition in Chapter 23.2) is paid. It is the responsibility of the scheme trustees to ensure that excessive employee contributions are not made. The purpose of any AVC should be made clear to the Tax and Duty Manual Pensions Manual – Chapter 3 8 employee. Please see Chapter 5.7 for the standard methodology for funding and benefit calculations.

 

[nest egg]

...It is the responsibility of the scheme trustees to ensure that excessive employee contributions are not made.

Does the above apply to executive pensions too?

 

[jasdpace@gmail.]

Indeed it does - so-called "executive" pensions are a sub-set of occupational pension schemes and the quoted para applies to all occupational pensions.

[By the way, the test is a bit bonkers but I don't have time to elaborate.]

 

[Gordon Gekko]

Those Revenue limits you’re referring to are enormous.

The more relevant constraint is usually the €2m Standard Fund Threshold.

I put €28,750 into my scheme each year but the point is that if, let’s say, markets fell by 40%, there might be merit in me lobbing €100,000 in there if I had it available.

 

[jasdpace@gmail.]

Hi Gordon,

Firstly, let's acknowledge that I was simply correcting the incorrect statement highlighted.

Secondly, these allowable funding limits can bite - say in the case of a public sector worker with a certain profile, i.e. hundreds of thousands of workers.

Thirdly, it is true that these tests, which I described as a bit bonkers, may be a complete waste of time to many, many thousands more.

 

[nest egg]

Indeed it does - so-called "executive" pensions are a sub-set of occupational pension schemes and the quoted para applies to all occupational pensions.

[By the way, the test is a bit bonkers but I don't have time to elaborate.]

I understood one of the benefits of an EP is that effectively there's no limit in terms of what can be contributed?

 

[Gordon Gekko]

I understood one of the benefits of an EP is that effectively there's no limit in terms of what can be contributed?

At a very high level, it’s a function of the size of fund required to deliver a pension equal to 2/3 of final salary.

Which is a pretty big number in most cases.

 

[Conan]

I understood one of the benefits of an EP is that effectively there's no limit in terms of what can be contributed?

No. Revenue rules state that you cannot fund for benefits in excess of the benefit limits, ie a pension of 2/3rds your Final Salary (including a level of indexation in retirement and a spouses pension on your death in retirement). Obviously if you have a high salary, then the fund limit will be high (though a fund value in excess of €2.15m will be hit with the Excess of Fund Tax).

 

[lawoman]

No. Revenue rules state that you cannot fund for benefits in excess of the benefit limits, ie a pension of 2/3rds your Final Salary (including a level of indexation in retirement and a spouses pension on your death in retirement). Obviously if you have a high salary, then the fund limit will be high (though a fund value in excess of €2.15m will be hit with the Excess of Fund Tax).

This has probably being asked before but;
Is the Revenue limit always two thirds of final salary ? How would this be calculated where someone would qualify for a full public sector pension ( class D1 PRSI and max service ) and also have non pensionable income such as farming ?

 

[Conan]

The Revenue limit is 2/rds from employment. But if the individual has other self-employed income then they can fund benefits (via a PRSA) on that income. The level of contributions qualifying for tax relief on that income is dependent on age.

 

[lawoman]

The Revenue limit is 2/rds from employment. But if the individual has other self-employed income then they can fund benefits (via a PRSA) on that income. The level of contributions qualifying for tax relief on that income is dependent on age.

So if we were to take an example of someone earning 40k from a public sector job and 1k from farming , aged in the late fifties how much could they contribute ?
35 per cent of 41k ?

 

[Conan]

So if we were to take an example of someone earning 40k from a public sector job and 1k from farming , aged in the late fifties how much could they contribute ?
35 per cent of 41k ?

No.
It's a percentage of earnings from that farming role. So 35% of €1k.
But you might have some very limited scope to invest AVC's under the Public Service scheme.

 

[lawoman]

No.
It's a percentage of earnings from that farming role. So 35% of €1k.
But you might have some very limited scope to invest AVC's under the Public Service scheme.

Agreed on the first paragraph

Why would it only be very limited scope as regards the public sector scheme ? If Revenue are OK with the provision of a pension up to two thirds of final salary and the Public sector pension is capped at one half of final salary, is there not significant scope to put funds into a pension ?

 

[Conan]

Agreed on the first paragraph

Why would it only be very limited scope as regards the public sector scheme ? If Revenue are OK with the provision of a pension up to two thirds of final salary and the Public sector pension is capped at one half of final salary, is there not significant scope to put funds into a pension ?

The typical Public Sector scheme for someone with full service provides :
- a pension of 50% of Salary, plus
- a lump sum of 150% of salary
Combined, that’s equivalent to a pension of 2/3rds of salary. If you have any non-pensionable income from the Public Service (overtime, allowances, BIK etc) you could fund benefits based on these through AVC’s.