Increase Tax Free Lump Sum-Public Service Retirement.

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dubman1

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Looking to increase tax free lump sum on public service retirement lump sum.
I know there is some kind of AVC one can invest in on retirement where tax can be returned and then the lump sum combined with returned tax can be spent.

Does anyone know the mechanics of how this works including time lines when one must apply etc.?
I have some information from a retirement course several years ago but very little on how to apply etc.

Does anyone know of firms other than Cornmarket ( I have contacted them several times and am currently waiting for a reply) who will take this business.
 
Firstly you have to calculate whether there is any “shortfall “ between the Scheme Lump Sum (based on the Scheme rules) and the Revenue Maximum Lump Sum (generally 150% of Final Salary).
So for example, if you have less than 40 years service at retirement, then the Scheme Lump Sum is likely to be less than the Revenue Max. So you could establish an AVC fund to bridge the gap. This is clear very tax effective in that:
- you get tax relief (up to 40%) on the contributions you invest - subject to certain limits
- you could get all the AVC fund back as an additional lump sum to top up the Scheme lump sum up to the Revenue max.
Cornmarket tend to manage a lot of Public Service AVC arrangements, but if you don’t want to use them, you could establish an AVC PRSA with any insurance company. The advantage of the Cornmarket route is that you will get the tax relief automatically under the “net pay” system, whereas if you do your own AVC PRSA you claim back the tax relief from Revenu.
What’ also worth considering is whether you are funding this AVC over a number of years (ie you have a few years to go to retirement) or whether you are considering a “last minute AVC” (because you are close to retiring).
 
Hi,

Could you give a worked example of a ''last minute AVC'' and the benefit of the contribution?
 
Trackman said:
Hi,

Could you give a worked example of a ''last minute AVC'' and the benefit of the contribution?
Click to expand...
Example:

Salary: 80k, 30 years service, pre94 DB pension scheme.

Actual lump sum = 80k * 30 * 3 / 80 = 90k
Max Revenue Allowed = 80k * 1.5 = 120k.

"Gap" that can be funded = 120k - 90k = 30k.

Before you retire - literally, even the very day before - you take out an AVC PRSA and put in 30k.

The day after you retire you may cash in the PRSA and take your 30k out again. (Or you can leave it as an investment if you wish.)

You make a tax return in due course and claim 40% tax relief on the PRSA contribution of 30k. You get 12k back from the Revenue. Nice!

Your net benefit is 12k minus any charges or set-up costs.

Note: There's also an age-related limit of 40% of salary for over 60 and 35% for ages 55 - 59. Any existing pension contribution you make comes out of this limit too, eg spouses and childrens contribution, any member contribution, PRD/ASD, etc. Say that comes to 10% in total and you're aged 59. You have 25% headroom left to make a contribution; that's 20k per annum. Of the 30k you contribute, 20k attracts tax relief in the current year. Happily you can backdate contributions to the previous tax year so the remaining 10k gets relief for the previous year.

Note 2: The contribution limits are based on actual salary in the year, so you're better off doing it at the end of a tax year rather than the beginning.
 
Trackman said:
Hi,

Could you give a worked example of a ''last minute AVC'' and the benefit of the contribution?
Click to expand...
Retiring from (say) Public Service with 30 years service.
Salary (say) €80,000
Scheme lump sum 30x3/90 x€80,000 = €90,000
Revenue max lump sum 150% x €80,000 = €120,000
Shortfall €30,000
Invest €30,000 AVC in final year
Less tax relief (say 40%) net contribution =€18,000
Effect is to turn net contribution of €18,000 into additional tax free lump sum of €30,000.
 
Conan said:
Retiring from (say) Public Service with 30 years service.
Salary (say) €80,000
Scheme lump sum 30x3/90 x€80,000 = €90,000
Revenue max lump sum 150% x €80,000 = €120,000
Shortfall €30,000
Invest €30,000 AVC in final year
Less tax relief (say 40%) net contribution =€18,000
Effect is to turn net contribution of €18,000 into additional tax free lump sum of €30,000.
Click to expand...
Snap!!
 
Just to clarify though - if you were retiring EARLY with 30 years service i.e. under cost neutral early retirement, Revenue reduce the 1.5 I think accordingly, depending on how many years to 'normal' retirement, I think.
 
podgerodge said:
Just to clarify though - if you were retiring EARLY with 30 years service i.e. under cost neutral early retirement, Revenue reduce the 1.5 I think accordingly, depending on how many years to 'normal' retirement, I think.
Click to expand...
Hi Podgerodge
Would you have a link to this Revenue rule?
 
Hi Ole1999
I'm not an expert on this, but EarlyRiser on here assisted me with info last year - see this thread, but I don't have a specific Revenue link.

Public Service AVC - confused with example given by provider

Hi, I'm stupidly confused by just one of the figures below in a Cornmarket example out of a brochure (bottom of p.12 of https://www.cornmarket.ie/uploads/13292_AVC_Scheme_Member_SQ_Booklet_08-18_REBRANDED_FA_WEB.pdf ) Example Aoife started her career before 1st April 2004, is paying D1 PRSI...
www.askaboutmoney.com
 
what if in this example one retires with full service and has been contributing to AVCs for years.
I know they they get 1.5 times final Salary tax free lump sum. given they have full service and pension entitlement what happens with the AVC pot?
 
If you are retiring from the old Public Service scheme with 40 years service, then your benefits will typically be:
- a lump sum of 150% of Final Salary
- a pension of 50% of Final Salary, with an attaching Spouses Pension on your death in retirement of 50% of your pension
- pension to be indexed in line with salary increases for the grade at retirement
This benefit package is close to the maximum allowed by Revenue. But the following potential gap exists:
- the Spouses Pension on your death in retirement could be 100% of your pension.
- if you have income from your PS employment that is “non-pensionable” (eg bonuses, overtime, allowances etc) then full benefits can be provided on such non-pensionable income.
If you will have full service, then I think you should have been advised that you have very limited scope for AVCs (unless you have non-pensionable income). Under Revenue rules, you cannot fund (using AVCs) for benefits in excess of Revenue limits.
 
thanks Conan for the info. I was advised that there was scope to contribute via AVC to avail of the 40% tax relief. this is with full retirement benefits on the old defined benefits public sector pension scheme. its all very confusing!
 
Dublin85 said:
thanks Conan for the info. I was advised that there was scope to contribute via AVC to avail of the 40% tax relief. this is with full retirement benefits on the old defined benefits public sector pension scheme. its all very confusing!
Click to expand...
There is more to AVCs than just availing of the tax relief. The primary decision is whether you have scope (within Revenue limit’s) to fund any AVCs. Clearly the most tax advantageous strategy is investing AVCs to fund a shortfall in the retirement lump sum (with up to €200,000 being tax free). But if you are going to have full service at retirement, then as I explained earlier, you have very limited scope for AVCs. So if someone is trying to “sell” you AVCs, you need to ensure that you have scope for AVCs. Most advisors to the Public Sector (eg Cornmarket) will work this out for you.
 
So there are two limitations to avcs. The revenue limit of 200k before being taxed and the 1.5 times the final salary cap?

I know many in the public sector who have been advised (cornmarket) to still buy avcs despite having the capacity to draw a full 30 year fast accrual pension. (Defence Force Pension) Ie They would max out at 1.5 times their final salary before any avcs.

In this instance, if wrongly advised, what would happen to these avcs?
 
Trackman said:
So there are two limitations to avcs. The revenue limit of 200k before being taxed and the 1.5 times the final salary cap?

I know many in the public sector who have been advised (cornmarket) to still buy avcs despite having the capacity to draw a full 30 year fast accrual pension. (Defence Force Pension) Ie They would max out at 1.5 times their final salary before any avcs.

In this instance, if wrongly advised, what would happen to these avcs?
Click to expand...
In terms of the retirement lump sum, the absolute Revenue max is 150% of Final Salary (Subject to certain rules). The taxation of any lump sum is separate. The first €200k is tax free, any excess up to €500k is taxable at 20%.
For someone with “full service” (whether that be 40 or 30 years), there is still scope for AVCs. I am not familiar with the detail of the Defence Forces Pension, but in a typical Public Service scheme the potential shortfall that might be bridged by AVCs are:
- the lump sum might be calculated on Basic Salary. But if you have non-pensionable income (eg bonuses, allowances, overtime etc) then such additional income is also potentially “pensionable”. So you could fund for 150% of this non-pensionable income.
- similarly you could fund for additional pension based on such non-pensionable income
- finally, the typical PS Spouses Pension (payable on the member’s death in retirement) is 50% of the members pension (so 50% of 50%). But the Revenue limit is a Spouses Pension of 100%.
- if you are a member of an “integrated” scheme (ie the pension benefit is inclusive of the State Pension for A Class PRSI Contributors), then you can fund additional pension income equal to the State Pension

I would be wary of any advisor (Cornmarket or other) “selling“ AVCs simply of the basis of tax relief. They need to explain what scope there is for AVCs ie what is the gap between the main scheme benefits and the Revenue limits.
 
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