Not in the case of a Defined Benefit Pension Scheme. The max is 150% of pensionable salary tax-free (120/80), as Conan indicated above. If @trident cashes in the AVC at retirement in the scenario he outlines, it will be subject to income tax (probably 40% in this case), USC and PRSI. Most people will transfer the money to an ARF rather than cashing-in the AVC.In that case, isn't €200k tax free and the additional €50k taxed at 20%?
The only scenario in which you can go beyond the 150% limit is if you are retiring beyond the normal retirement age for your scheme and you have more than the maximum number of years required for a full pension. So if your normal retirement age is 60 and you are retiring at 65 with 45 years service you could top-up your tax-free lump sum from an AVC by 15/80 - to bring it to 135/80. You cannot go beyond that. And you cannot go beyond 120/80 unless the service is both in excess of the maximum allowed in calculating the main scheme benefits, and it is served beyond normal retirement age for the scheme.Would this be allowed
That’s correct, BUTThanks Early Riser and Conan for the detailed replies. So the situation is this: I have an interest only mortgage, due around the time I retire. I need to have saved €300,000 by then to pay off the capital on the mortgage. I will have around €150,000 as a lump sum. I have an AVC, and assuming that I will pay about 50% tax on it when I cash it in upon retirement, I would need to have an AVC valued at around €300,000 upon retirement. Is this a reasonable plan?
Thanks in advance for any help/advice,
Regards
T
Thanks Conan. My plan is to contribut 20K per year for 10 years to an AVC. That, combined with another AVC would bring the total AVC to at least 300K.That’s correct, BUT
- you will only get tax relief on AVC contributions at your marginal rate of Income Tax. - currently 40%
- the AVC fund will accumulate tax free within the fund
- but then under your plan (drawing down the full value as income in the year when you retire) you will possibly be taxed at c50% (PAYE +USC+PRSI).
So you need to consider your investment term to retirement. If you are only getting 40% relief on the way in but paying 50% on drawdown, it may not make much sense , unless you have a good number of years of tax-free growth.
If you only have a short period of years to retirement, then you might be better investing the AVC equivalent in a non-pension structrue.
I think you firstly need to work out what your lump sum will be from your existing Pension Plan . Are a member of a DB or a D.C. Scheme? If you are not likely to get the Revenue max lump sum (say 150% of Salary from a DB scheme), then making AVCs to bridge that gap is clearly tax effective.Thanks Conan. My plan is to contribut 20K per year for 10 years to an AVC. That, combined with another AVC would bring the total AVC to at least 300K.
Would you consider 10 years a suitable length of time to stick with the AVC approach of saving ?
Thans again in advance for any help.
Regards,
T
Good question.Then if one of them had an AVC, and draws that down annually, that AVC income would be taxed at 40%, and I assume PRSI and USC, so while the AVC investment benefited from 40% tax relief on the way in, the AVC income would be taxed at about 50%.
So why would anyone/or any couple, who would have a relatively high annual pension brining them to the limit of the 20% tax rate, invest in an AVC in the first place?
No, the AVC is not linked to the State Pension age (if that is what you mean). It is linked to the Occupational Pension - in your wife's case the Public Service pension. So if she takes early retirement she has to "retire" the AVC at the same time - usually by converting it to an ARF to be drawn down as retirement income (after maximizing the tax free lump sum as far as Revenue allow).Can an AVC be used for early retirement in the public sector or is it tied to the retirement age (66 or whatever it is)?
That is the same as for a PS pension. In effect your annuity for full service combined with the State Pension should equate to 50% of pensionable remuneration.Annuity : circa €31k
Lump Sum : circa €134 k
On my scheme A Class contributors deduct twice the old age pension to arrive at their reckonable pension wage. So in my case it would be €90k minus circa €28k which would give you €62 k x 40/80 = €31k.
The PS Supplementary Pension is not a Social Welfare payment. It is paid by the employer in the event that the retiree is not working and not eligible for a Social Welfare payment. It is a subsidiary part of the Public Service pension scheme (class A PRSI). I have no idea whether any Semi-States operate a similar scheme.You are not allowed to claim a supplementary pension if you retire before the State Pensionable Age. I am not sure if you could claim job seekers allowance but I do not believe so.
I thought if I had an AVC of say €200k built up at 60 I could apportion €66k of it to the €134 lump sum I'd receive to top up the €200k tax free lump sum element and then liquidise the remaining €134k of the AVC immediately, paying 20% tax on it.
But surely overtime would have already been part of your taxable remuneration so that wouldn’t count
For pensionable allowances in the PS the 3 best years in the last 10 are considered. I don't know if Revenue operate on the same basis for non-pensionable payments.Would it be in the last three years before you retire or could you go back further than that
The more I read about AVCs the more sceptical I get
Am I correct in saying then that there is no other way for me to benefit from the €2m SFT as I am on a DB ?
I'm effectively locked into the value of the DB pot and cannot avail of the 20% tax rate (no prsi, usc etc) on the first €300k after the €200k tax free limit on any other kind of lumpsum apart from the 120/80 that the DB gives you with full service ?
Yes, you can.Employee PAYE Credit ? €1,775 (not sure if you can still claim this if you are using your pension
I think we would be able to earn €49k jointly before moving into the 40% I think this would allow us to draw down circa €23k from an ARF without putting us into the 40% tax band.
My wife has a small deferred DB pension that may be worth circa €10k at age 65. Her Executive pension would also mature at that point (we could possibly draw down on that earlier, I will look into what potential penalties there might be)
Under the current OAP rules (we are both A Class and will both have full PRSI credits) we would then get circa €28k state pension at age 66 (who knows what the age will be at that stage) So from 66 onwards it should be fairly well funded. The reason to look to retire at 60 though would be to travel a bit and enjoy ourselves when we are hopefully fit and healthy.
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