Making AVC'S at low rate relief or no relief

K

KOW

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Nearing retirement couple of years roughly to go.

Currently 280k in DC scheme run by New Ireland.

At retirement ARF.
Fair amount of cash on the side.
Would it be wise to put say 200k or more into the pension over the next couple of years taken in to account small amount of the 200k will get relief at 20% and most of the money will get no relief.

Rationale. Any growth in the pension will be tax free. Fees in the pension are fairly low. Simple regarding tax etc. If I did not do this I would be investing in equities anyway.
Hope that makes sense.
 
I think the consensus is to maximise pension contributions within tax incentive limits.

Hold on to your cash outside the pension
Better access
Use tax advantage eg state savings

That's my 2c
 
What will your income be in retirement?

I don't see any point in making contributions to a pension fund which attract no tax relief which will be taxed at 30% on drawdown ( 40% tax rate less 25% tax-free lump sum)

On the other hand, if you will not be paying tax in retirement, then getting 20% tax relief now would be worthwhile.

I don't see the tax-free accumulation being big enough to change that calculation.

Pensions rules keep changing. The government might well do another grab on pension fund assets.

So you should keep your money outside a pension fund in cases where there is not a clear financial benefit from putting it into a fund.

Brendan
 
I have a client who is 53. She has no “earned” income so can’t get income tax relief in the traditional sense.

But read the analysis before jumping to generalisations.

We recently made a pension contribution of €400k.

She has a substantial investment portfolio so is currently paying 52% tax on all investment income.
She is therefore receiving income tax relief at 52% up to age 75 which is actually better than the capped maximum 40% income tax relief on earned income.

she will also receive exit tax relief twice (two full 8 year cycles)

post 66, PRSI drops away so there is a saving of 4%pa currently on investment income.

In retirement only forced to expose 5% of income to tax ,95% remains in the ARF free from personal tax like messy exit tax calc and the QFM does the tax reporting.

final benefit ARF as inheritance is taxed at 30% rather than 33%.

so for some people a very good strategy
 
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Marc said:
She is therefore receiving income tax relief at 52% up to age 75 which is actually better than the capped maximum 40% income tax relief on earned income.
Click to expand...

I am trying to understand this.

If she keeps the money in her own direct ownership, she pays 52% tax on the dividends and 33% tax on the realised capital gains.

If she puts it in to a pension fund, the pension fund won't attract any tax on income or capital gains. Is that it?

Brendan
 
Marc said:
I have a client who is 53. She has no “earned” income so can’t get income tax relief in the traditional sense.

But read the analysis before jumping to generalisations.

She has a substantial investment portfolio so is currently paying 52% tax on all investment income.
She is therefore receiving income tax relief at 52% up to age 75 which is actually better than the capped maximum 40% income tax relief on earned income.

she will also receive exit tax relief twice (two full 8 year cycles)

post 66, PRSI drops away so there is a saving of 4%pa currently on investment income.

In retirement only forced to expose 5% of income to tax ,95% remains in the ARF free from personal tax like messy exit tax calc and the QFM does the tax reporting.

final benefit ARF as inheritance is taxed at 30% rather than 33%.

so for some people a very good strategy
Click to expand...
You don't say if she puts anything into a pension
Maybe you deleted a line by mistake
 
Brendan Burgess said:
I am trying to understand this.

If she keeps the money in her own direct ownership, she pays 52% tax on the dividends and 33% tax on the realised capital gains.

If she puts it in to a pension fund, the pension fund won't attract any tax on income or capital gains. Is that it?

Brendan
Click to expand...

Yes, she is receiving genuine gross roll up, rather than exit tax gross roll up.

a “balanced” portfolio will have cash, bonds, equities and real estate.

so annually you are deferring either exit tax on your bonds at 41%, income tax on your dividends at 52%, capital gains tax and DIRT at 33% etc.

so depending on the composition of the portfolio you are receiving substantial tax relief. Just not against earned income in the way most people understand it. Passive investment income is just as relevant as salary.
 
Exit tax is a particularly nasty tax for personal assets and anyone trying to use ETFs is crushed by the complexity of the rules.
The pension wraps ETFs in an exit tax free environment.
 
Marc said:
Exit tax is a particularly nasty tax for personal assets
Click to expand...

Hi Marc

The OP is paying tax at 20%

Presumably he does not have huge investment income.

Is he likely to be hit by exit tax? I thought it had very limited applications e.g. moving assets out of the country.

Brendan
 
Brendan Burgess said:
Hi Marc

The OP is paying tax at 20%

Presumably he does not have huge investment income.

Is he likely to be hit by exit tax? I thought it had very limited applications e.g. moving assets out of the country.

Brendan
Click to expand...

Exit tax is industry short hand for EU/EEA/DTA domiciled regulated funds also known as “offshore funds” which bizarrely also includes unit linked funds from Irish Insurance companies
 
Brendan Burgess said:
Hi Marc

The OP is paying tax at 20%
Click to expand...

Again, my analysis concludes that “only paying income tax at 20%” is considerably overstated as a reason not to bother with AVCs

If I don’t make an AVC contribution then I have to do something else with the money and for many people that will be a retail investment product.

Retail investment products in Ireland are subject to a 1% levy on the way in and a flat rate of tax on both income and gains of 41% higher than both the CGT rate and income tax rate of a 20% taxpayer.

therefore logically there is a small marginal benefit for a 20% taxpayer of making an AVC over a retail personal investment
 
Let’s say you don’t buy that argument and you have €200k and you go and purchase a small share portfolio with a dividend yield of 2.5%.
you’ll make €5000pa in dividends. Not bad until you realise that there is a minimum PRSI charge of €500 to pay or 10%. Ouch!
 
What I am trying to do is more or less guarantee myself of a pension of around 30k pa.
12k from state pension.
So say in the next 2yrs I am trying to invest in order to generate another say 18k. Pension now 280k.
Have 500k state savings shares banks CU etc. RIP that I will own in five years.
So in theory top up pension by 320k. Pension at retirement 600k. Take 150k tax free leaving 450k.
Take 4% pa giving me 18k+12k=30kpa more or less. Rationale again growth will be tax free inside a pension wrapper.
Left with 180k out of my original 500k plus 150k tak free sum. Total 330k to invest outside of pension wrapper.

OR

Say pension is worth 300k in two years. I take 75k tax free sum and taking 4%
from ARF gives me 9k pa. Total income 21k. I now have 575k to generate my target of another 9k pa.
I dont see a problem with that. Yes its nice to have full control over the 575k but any growth when invested will be heavly taxed. Common sense would be to stay in control myself.? Invest myself?
 
Hi Marc

The OP is is nearing retirement.
He is paying 20% tax.
So he is not hit by the minimum €500 PRSI.

Brendan
 
I’ve never bought the argument that a thread can only relate to the question asked by the OP
 
HI KOW

When you retire, you are going to have

€12k state pension
€225k in an ARF
€75k in cash ex pension fund
€500k investments
And an RIP?

You don't give the rental income, but it wouldn't be that hard to get up to use up the €35k 20% tax band in retirement.

It seems wrong to me to be contributing at 20% tax relief and run the risk of having the income taxed at 30%.

But, with that level of assets, you should be going to a Chartered Financial Planner and paying a fee for advice.

Brendan
 
Thanks for feedback from one and all.
Yes Brendan ready to talk to One of the Planners that post on AAM. Just teasing out ideas in the old head.
Regarding the RIP 17500 pa.-2200 maintenance fees so 15300pa. This is leased to council for another 5yrs. (long term lease agreement}. Around 80k owed now. In theory could pay off and take income from same and leave pension to grow tax free.
Mrs Kow retires December 2021 DB pension so will go and have a chat and get sorted.

Thanks All.
 
What is the interest rate on the mortgage?

Unless it's a very cheap tracker, you would be better paying it off.

You are borrowing at the mortgage rate less tax relief to put it on deposit at 0%

Brendan
 
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