Overfunding through AVCs

[Ent319]

What happens in practice if a member of a defined benefit scheme has overfunded their AVC when they go to draw down their pension?

I've read conflicting information on this issue in threads here. Some say that the money has to be refunded to the employer and / or scheme trustees. In other threads I've read that revenue refunds the contributions to the employee and then forces them to pay tax on it (Income Tax + USC? + PRSI?). So which is it?

If it's the latter overfunding might not be that bad? You're still able to avail of tax free compounding and the boost to compound interest from the loan of income tax from revenue until it comes time to draw down the pension.

 

[Conan]

Firstly, it is difficult to overfund a DB scheme with AVCs. The Revenue maximum benefits tend to be well in excess of most DB schemes (With the possible exception of the older “gold plated” public sector scheme).
But any AVC scheme must be “attached” to the main scheme. So in the event of any overfunding, any excess which cannot be used to purchase additional benefits up to the Revenue limits must be retained by the main scheme. But with proper contribution advice any member contributing AVCs should avoid the risk of overfunding.

 

[Dave Vanian]

Firstly, it is difficult to overfund a DB scheme with AVCs. The Revenue maximum benefits tend to be well in excess of most DB schemes (With the possible exception of the older “gold plated” public sector scheme).
But any AVC scheme must be “attached” to the main scheme. So in the event of any overfunding, any excess which cannot be used to purchase additional benefits up to the Revenue limits must be retained by the main scheme. But with proper contribution advice any member contributing AVCs should avoid the risk of overfunding.

Interesting. I didn't know that. So in theory, a Public Servant could overfund an AVC by way of an AVC PRSA that they choose themselves with, for example, Irish Life. At retirement, when the overfunding was discovered, Irish Life would then have to pay over the overfunded amount to the State. As you say, the circumstances that would give rise to such a situation would be rare but it does illustrate that you really need to know what you're doing with AVCs or else get advice.

 

[Ent319]

Thanks for getting back to me Conan. The reason I asked the question is because in this thread Steven Barrett said re: overfunding an AVC that "The Revenue won't take the your AVCs and give it to the state. They will unwind the value of your contribution that makes you overfunded, refund it to you and tax it as income. But you won't be overfunded." Perhaps I'm missing something?

 

[Conan]

The Revenue Pensions Manual does not specifically deal with a situation where AVCs might lead to an overfunding situation. It states that individuals contributing AVCs should make sure (with advice from the AVC provider) that any contribution will not result in an overfunding situation.
I cannot contradict what Steven Barrett said as I never came across such a case during my time working in the Pensions world. It may be the case now that Revenue adopt the pragmatic approach Steven outlined. But there is a responsibility on AVC providers (including PRSA AVC providers) to ensure that there will be no overfunding.