Maxed out my AVCs - Is exceeding the limit a good idea?

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MugsGame

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This question is only tangentially related to my other AVC thread and slightly more theoretical, so hopefully it makes sense to separate them.

I want to significantly increase the exposure of my portfolio to equities and have a lump sum available to do so. My DC occupational pension scheme offers an index-linked global tracker fund with 100% allocation and relatively low annual fees.

I gather I can make an additional lump sum AVC to my DC occupational scheme now (well over the age-related tax relief % of €115k) and bring these contributions forward to future years for tax relief purposes.

I'm a higher rate tax payer, am comfortable locking up these AVCs until I retire, am happy with the risk and fee profile of my occupational pension vehicle, am not concerned about timing the market or future pension levies, and expect to have sufficient income in future years to make good use of the accumulated relief.

Is making an "advance AVC" like this the most tax efficient way to increase my equity exposure? Contributions within the scheme benefit from gross roll-up, and avoid the need for me to track investment returns for deemed disposal etc.

If so, supposing I pay in now, how do I get the advance AVC recognised for tax relief in future years, can I just ring Revenue at the start of each year and ask them to reflect the appropriate amount for that year as an additional tax credit for my employer's payroll?

I'm assuming of course that the Government don't significantly change the tax treatment of pension contributions on foot of ongoing consultations. I might wait for that to conclude, although I assume there'd be a transitional period over a number of years and hopefully some allowance for contributions that were "grand-fathered" in in this way.
 
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Hi Mugs

I have edited the title to reflect the key point in the question.

I don't know how Advance AVCs work.

So let's say your limit is 20% of salary, and you contribute 25%. Are you allowed claim the 5% the following year?

Sounds a bit messy. And does it achieve much? Presumably next year, you will claim the 5% but then can claim only 15%?

I think you should stick to the limits.

Is there any risk that you might have a cut in income next year which would bring your salary down? Then you might be getting tax relief at 20% instead of 40%. That would be very inefficient.

If you are going to have a good salary next year, why not just make the contributions to the limit next year?

I don't think you need to wait for the review of pensions to be concluded. The practice for 2019 won't change. So unless you lash in more than 40% of your salary, you should be able to use the 20% excess next year.

But why not just wait until January and put it in then?

Brendan
 
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Thanks Brendan. Carrying AVCs forward for future tax relief is definitely possible - Form 12 has an explicit box for this (Amount carried forward from a prior year, from which relief has not been obtained under AVCs) and I've definitely seen references to it on revenue.ie and third party sites.

As to why I'd want to do this, my pension is woefully underfunded: my fund is less than my annual salary as I deliberately prioritised other financial goals in the past. I now want to maximise the "time in the market" of my future contributions. What prompted this line of thought was that I've just made a back-dated AVC for 2017 and realized that I've missed out on all the equity growth since then by not contributing at the time, which got me thinking about future contributions.

I expect the majority of my income to be taxed at 40% for at least the next 10 years, even allowing for a drop in income should my circumstances change. My skills are very much in demand, and I have a generous income protection policy should I be permanently incapacitated.

Another way to think about this - I have a lump sum (say 5 years worth of AVCs) which I want to invest in equities. The most tax efficient way seems to be to put this into my pension scheme now, and claim relief over future years (not just 2019). I can get tax-free exposure to equity growth now (accepting the risk that markets fall) and use it to increase (via tax relief) my net income in future years. Gross roll-up and the AVC lump sum make the pension vehicle attractive for this even though it's really income tax deferral, not tax relief.

One issue: if I contribute 5 years worth of AVCs to my employer scheme now, but then change employer before the 5 years are up, the past contributions might not (legally) qualify for tax relief against income from another source (that seems silly to me but may well be the case). This might be an argument in favour of using a PRSA AVC vehicle, perhaps self-directed (fees are not really a consideration as my current employer scheme is actually very competitive, although I might prefer a wider choice of funds.).
 
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OK

So let's say your limit is €20k a year and you have €100k cash doing nothing.

Should you put in €100k now and then allocate €20k a year over the next five years for your tax relief.

I don't think so. The tax treatment of pensions is too uncertain. All the indications are that it will be reduced. It might not be the right strategy in two years, but you will have committed to it.

Why not just invest the €100k in equities now in your own name? You will always have access to it. You miss out on some tax-free growth in the fund, but I think that is a small price to pay for avoiding the risk of an unfavourable tax change.

If you continue to earn plenty of money for the next 5 years, you will be able to maximise your contributions each year anyway.

Brendan
 
I wouldn't go over the limits. Retirement income doesn't have to come from a pension, you can use other assets as well to provide you with an income. If you now have scope to make big contributions, won't you be able to maximise AVC's next year too? You can just invest the surplus elsewhere.

And don't be fooled by the low cost index funds that are available through your pension. One of low cost index funds available through group pensions is absolutely shocking. It doesn't follow the MSCI World index like the main ones do, it follows it's own benchmark (it doesn't disclose what that is made up of). And even still, it missed that by 8%!!! For an index fund to miss it's benchmark by that much is shocking.


Steven
www.bluewaterfp.ie
 
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