Cost Neutral Retirement and last minute AVC - conflicting advice

mcauleyej

Registered User
Messages
9
Hi,

I can't find a definite answer to this and would be grateful for your thoughts.

My wife (teacher) is looking at taking Cost Neutral Retirement at age 56 with 21 years service. Let's say her salary is €68,000, she started teaching in 1994 (reduced hours). Her lump sum (actuarially reduced) is €50,000. As she has over 20 years service she can get a tax free lump sum of 1.5 times final salary if she retires @ 60. Can she do a last minute AVC to top up and so by how much? I'm getting two sets of conflicting advice.

Advice 1: As she is taking cost neutral her lump sum entitlement will entitlement will be final salary*1.5*(actual service/potential service). I think potential service assumes normal retirement age of 66. So she should be entitled to 68,000*1.5*21/31= €69,000. So she can do a last minute AVC for €19,000.

Advice 2: As she is taking Cost Neutral she is only entitled to a tax free lump sum of Final Salary *3/80* actual service = 68,000*3/80*21 = €53,550. So she can do a last minute AVC for €3,550.

Do you know which is correct?

Thanks,

Eugene
 
I am going to suggest neither. The formula at 1 above is correct (Advice 2 is definitely incorrect). However, I believe the denominator for Advice 1 should be calculated by reference to the "normal retirement age" for the pension scheme. Assuming that your wife is a member of a pre-2004 pension scheme, this would be 60. So the Revenue max lump sum whould be €68,000*1.5*21/25 = €85,680. So she should be able to top up by up to €35,680.

If your wife only joined the Pension Scheme after 1st April 2004 and bought back earlier service then the calculation at 1 above is correct (but why 31 as denominator rather than 30?). "Normal Retirement Age" is not assumed - it is defined in the terms of the scheme.

Have you contacted an AVC provider (Cornmarket or other)? They are usually ok with this.

Here is a link to the relevant chapter in the Pensions Manual :https://www.revenue.ie/en/tax-professionals/tdm/pensions/chapter-09.pdf
 
Thanks Early Riser, I had wondered was it 60, even better! I'll check the scheme for the definition of the NRA. It was an AVC provider who gave me the second piece of advice (not Cornmarket). Thanks again.
 
Don't forget to factor in the age-related limits on pension contributions. I am not too familiar with this but at 56 the limit is 35% of pensionable earnings. So on a salary of €68K that is about €24k for a full year. If your wife wanted to do an AVC for circa €37K the contributions would need to be attributable to 2 years. Contributions can be attributed to a previous year provided the relevant Revenue return is done on time (sometime in November, I think). For example, if your wife was retiring this year she could make a lump sum payment and attribute €24K of it to last year and the balance to this year.

The AVC folks should be better up to speed on this than me. And there are other contributors on this forum who are familiar with this and, perhaps, may advise.

PS. Maybe not the adviser from no. 2 in your OP!

PPS. Actually, to note, that 35% age related limit is inclusive of the normal salary pension deduction for the main scheme.
 
Last edited:
Thanks again Early Riser, the 35% is the limiting factor even including last years income, as she's planning to retire at end of August. I've all the details with a provider now so hopefully this will work out.
 
Back
Top