How much should we pay into an AVC / PRSA and general financial advice also needed

S

Staedtler

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Dear all,

My wife and I are both civil servants.

I'm 40, my annual salary is 60k, and no further promotion expected.
I will have 36 years service at age 60. For certain personal reasons, which I'm not going into here, it's very unlikely I'll be able to stay until 60, and I will be leaving at age 55 on an actuarially reduced pension.

My wife is 38, her annual salary is 33k, no further promotion expected, and she will have 40 years service at age 60. (She's currently paying an extra contribution each week to buy 8 years notional service under the NSP scheme)

We both joined the civil service after April 1995, but before April 2004.

Our mortgage is currently € 1,200 per month, and we hope to have it paid off in 10 years.

We've no children and are not likely to at this stage.
After all living expenses etc. we’ve settled into being able to save approx. €10,000 p.a. We've accrued €30,000 in savings so far, which is currently placed on deposit at a lowly, but safe and accessible 2.5%

Having watched other people lose money on property / shares / funds etc. we're fairly risk adverse.

Obviously, we can see the considerable advantages of saving money before paying tax on it by using an AVC / PRSA, but we don't like the thought of locking away much of our money for so long, out of our control, and possibly being stung later on by very poorly performing funds and high commission charges etc.

1. How much should we consider paying into an AVC / PRSA, if any ? and any other overall financial advice for us ?

Naturally we intend seeking detailed advice from a financial adviser, but the reason for this thread, was I that was hoping to get a feel here for the direction we should be going in, and research we should do, before going off and getting detailed independent advice.

I would like to pay for an independent financial review / advice rather than have someone push commissioned products our way.

2. Can anyone also recommend any good independent financial advisers that are also civil servant friendly, and familiar with civil service pensions ?

All genuine advice greatly appreciated, thanks for posting,

Regards,

Staedtler
 
Has anyone any advice, or do I take it from the lack of replies that AVC's are not the way to go here ?
 
Good Morning Staedtler

Firstly to answer your question. AVC's are a great way to top up your pension. The Superannuation scheme will only pay out a maximum of 50% of final salary with 40 years service. The revenue will allow anyone to have up to 66% of your final salary and AVC's are a great way of topping this up. I used to work in Public sector specific financial advice so i know this field in depth. If your wife has 40 years service this will entitle her to 1.5 x salary in tax free cash and circa 1/2 her final salary in a pension. She can also top up her pension through avc's or a PRSA AVC.

I am not working in an independent financial advisory firm but I do work for a large life company who provide financial planning advice. If I can be of any assistance please let me know. If not best of luck finding an independent advisor on the market place, I am sure there are some great ones out there that can help you. Commission fees in general are not overly high these days as the market is very competitive.
 
I think you have hit the nail on the head. Traditionally Punters have run with AVCs because of the tax advantages but I'm not sure how many of them are happy with the final result

1) You lose control of your money until retirement. This is particularly worrying in these volatile times. You really are at the mercy of Government policy.
2) Huge fund management costs. In my opinion the pensions industry is rampant with Parasites who do very little and charge a lot for their services
3) Fund performance can be sketchy.

If I was in your shoes I would first of all work out how much you will be entitled to in retirement, based on current rules of your pension scheme and at the same time try to work out how much money you will actually need in retirement.Your goal then is to try and fund the difference through some form of investment (not necessarily AVC)

Try to make sure that you will be paying tax in retirement at the basic rate. There's no point in making huge AVC contributions now which will later require you to pay top rate of tax on pension draw down.

Also remember that the purchase of an annuity at retirement age will not buy as much income as a lot of people expect. At current rates a 65 yer old male purchasing a basic annuity which does not increase from year to year will get approximately 5000 euro income for every 100,000 of pension savings. If you need to pay top rate of tax on this 5000, your net income may only be in the region of 2500. That's a very small return for your hard earned savings. A 55 year old male (on retirement) will do a lot worse on the purchase of an annuity for obvious reasons.

I would encourage you to look at some of the alternatives :

1) Spend a little more today and enjoy yourself while you're still relatively young. After all you have two Civil Servant pensions to look forward to
when you retire. As already said, you have to decide if that is enough for you to live on or not

2) You should consider using your extra disposable income each month to pay down your mortgage faster. This may not be a bad idea.

3) Given that your future pensions would appear relatively secure you might consider that you could opt for something with a little bit more risk


I can see that the tax advantages of an AVC might be attractive to a couple earning a joint 93K but I for one, would not be keen on this option at this time.
 
Hi Importer

If Staedtler's Wife will have a maximum of 40 years service isn't an AVC the only option to top up her benefits to revenue maximum? It is a good idea to get an illustration from your superannuation officer for what you will be getting in retirement. Some people can decide better when the figures are presented to you.
 
I think my question is not whether she can do it. My question is whether its a good idea to do it.
 
First thing to do is try to estimate how much income you will need in retirement and work forward from there.

Based on the figures provided I estimate that your combined pensions (in todays terms) will give you an income of around 40,000. Against that you have to consider that any income over 41,800 will be taxed at the top rate which is around 50% (inclusive of USC)
Is there any point in paying into AVCs now if you end up being taxed on the income stream in retirement at 50%. Conventional wisdom would say its not worth it.

I agree that paying down your mortgage quicker might be a good strategy for the next number of years as we work our way out of the current economic depression. Once the mortgage is paid off it might then be a better time to consider other non AVC investments in either property, equities or bonds which would offer a better fit for you in terms of growth, yield and tax efficiency
 
The current tax advantages of an AVC were the main lure for us, but as rightly pointed out in our situation, there seems no point in paying into AVCs now to avoid tax, if you end up being taxed on the income stream in retirement at 50%, and losing control of our money until retirement, paying large fund management costs, and risking a poorly performing fund. There is also no guarantee that the government won't remove some of the tax benefits in the near future.

I don't think I'll pursue AVC's for now. I was never too keen on them.

Thank you everyone for the advice so far, much appreciated.
 
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