Single Scheme and PRSA AVC: Clarification on Lump Sum Limits

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Shreddit

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If I’ve understood it correctly (but please correct me if wrong), there are three ways the Revenue can calculate ‘final remuneration’ for maximum potential pension lump sum purposes. This calculation is done per occupational pension scheme. I’m public service with no bonus etc, just one expected final salary of €120k. I believe my maximum potential lump sum from this single pension scheme will be calculated as 1.5x final gross salary, so €180k.

Based on my service, the estimator tool is giving me a lump sum of €101k (the tool needs updating as I won’t get this till 66 but I’m working from this figure).

So I’m €79k short of SPS max of €180k and €99k short of the Revenue €200k.

Now, can I setup a standalone PRSA AVC that allows me to get to €200k or am I limited to €180k? Because I’m in the SPS, is it that the 1.5x salary takes precedence and ‘overrides’ the Revenue limit of €200k? Or is it because the SPS is one occupational pension scheme, so it’s the 1.5x salary as the limiting factor? Or is it that because my public service salary is paying into the PRSA AVC that they are somehow viewed as ‘linked’ even though the PRSA AVC is setup completely by me?

If I’m limited to the €180k, what if I have a sole trader business as well as my public service job. Can I setup two standalone PRSA AVCs, one paid from my public service salary and one paid from my business? Would the business one be viewed as a fully separate pension scheme and allow me to get to €200k?

So SPS will provide €101k lump sum. Then PRSA AVC #1 would be set up by me and paid into from public service salary, and this would be what I use to get a further €79k to get to the max allowed for this scheme, so €180k. Then PRSA AVC #2 is also set up by me and paid from the business, and is used to get the final €20k.

So €101k + €79k + €20k. Can that be done?
 
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The 1.5x final remuneration only applies if you either have 40 years service in that employment, or if you have 20 years ending at your normal retirement age (and this will also take into account precious employment lump sums). That's your first complication.

Secondly, this gives you you maximum pension lump sum. The first €200k of pension lump sums (from all employments) is taken free, the next €300k is taxed at 20% and the remainder is taxed as PAYE income.

You can set up a PRSA AVC to achieve a lump sum of €180k (assuming your calculations are correct). Your sole trader business will allow you to pay into a PRSA. The lump sum from this will not affect the lump sum from your public service scheme (assuming they are concurrent employments), but it will affect the €200k limit.
 
Shreddit said:
So I’m €79k short of SPS max of €180k and €99k short of the Revenue €200k.
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If we assume the €101k from the Estimator Tool and salary of €120k are the working figures for the moment, your 'SPS max' is €101k.

The maximum lump sum that the Single Scheme will pay you based on your accumulated Lump Sum Referable Amounts indexed for inflation is €101k. The Scheme can't pay you any more than that.

However, if you have over 20 years service, Revenue rules allow you to use an uplifted scale and would allow you to take a lump sum of 1.5x of your highest Final Remuneration figure. As you say, this figure amounts to €180k (assuming you have no retained benefits).

The Scheme is paying you €101k, and so you have the ability to use AVCs to fund up to your 'Revenue Max' lump sum, and so fund for €79k.

The tax free limit for lump sums (from all pension arrangements) is €200k.

Your Revenue Max lump sum potential is €180k.

If at the point of retirement you have €99k in a PRSA AVC (€79k + €20k), your PRSA AVC provider will verify the lump sum you are getting from your Occupational Scheme (in order to calculate how much they can release to you as a lump sum), and will give you choices as to how to take your benefits. You could take €79k tax free from the fund of €99k to get to your Revenue Max lump sum limit. The balance of €20k could be used to buy an annuity, enter into an ARF, or take the funds as taxable cash.

As the lump sum from your Occupational Scheme (€101k) plus the lump sum you will take from your PRSA AVC (€79k) is less than the €200k tax free limit, your €180k is all tax free. You have €20k of the €200k remaining (more on this below).

Shreddit said:
can I setup a standalone PRSA AVC that allows me to get to €200k or am I limited to €180k?
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You are not limited to €180k but you are limited to the amount you can take as a lump sum as explained above.

Shreddit said:
is it that the 1.5x salary takes precedence and ‘overrides’ the Revenue limit of €200k?
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The 1.5x Revenue Max lump sum and €200k tax free limit are two different limits. 1.5x could amount to any figure - if it amounts to €250k, then €50k becomes chargeable to tax @ 20%, and so the net lump sum into your hand after tax is €240k.

Shreddit said:
PRSA AVC that they are somehow viewed as ‘linked’ even though the PRSA AVC is setup completely by me?
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Yes, a PRSA AVC is always linked to a 'Main Scheme'; the Single Scheme in your case, my employer's occupational scheme in my case. This is notwithstanding that you are free to go and set up a PRSA AVC by yourself with a provider of your choice.

Shreddit said:
what if I have a sole trader business as well as my public service job. Can I setup two standalone PRSA AVCs, one paid from my public service salary and one paid from my business?
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No. You set up a PRSA AVC to maximise your entitlements from your Occupational Scheme and you set up a PRSA or Personal Pension for your self employment.

I need to double check a point - if you have a dual employment, you have to maximise your contributions to your Occupational Scheme first for income tax relief purposes.

Shreddit said:
Would the business one be viewed as a fully separate pension scheme and allow me to get to €200k?
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You could use a PRSA with contributions from your self employed earnings to fund the €20k remaining of your tax free limit.
 
Sorry to tag on a related question but I'm interested in the 20% tax after 200,000.

Say you've got a full PS pension with a lump sum of 150k and a yearly pension of 50,000 and and are paying the high rate of tax annually.
You have an AVC fund at retirement of 200k

Does it make most sense to take your full AVC balance as a lump sum on retirement and pay the 20% tax rather than use it for an ARF where you will be paying 40% on each annual drawdown because your occ pension is already into the higher rate?
 
I was thinking the exact same. After taking your tax free lump sum, extract the rest of your AVC fund, up to 500k, as cash paying 20% tax. Put that money in to some investment outside your pension where you only pay tax on gains and only at (hopefully) CGT of 33% ?

I suppose you would end up paying 20% + 33% on some of the returns that amount of money invested, outside a pension, could generate compared with leaving it in an ARF where you would have to pay 40% max.

It's beyond my abilities to work that out and I don't trust ChatGPT anymore!
 
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messyleo said:
Does it make most sense to take your full AVC balance as a lump sum on retirement and pay the 20% tax rather
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If I'm reading your post correctly, you won't be given the option by your AVC Scheme/PRSA AVC provider to pay 20% tax from your AVC, as you have already exhausted what you can extract as a Revenue Max Lump Sum.

messyleo said:
Say you've got a full PS pension
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You have a full PS pension - let's keep things simple and assume that you are on a Final Salary Scheme and that your final salary equals your highest 'final remuneration' (Revenue speak), and you have 40 years of service and are getting a lump sum equal to 1.5x salary from your employer.

If you present at retirement to your AVC Scheme provider or PRSA AVC provider looking to access the AVC fund of €200k, you will be asked to provide your remuneration figures and lump sum payable from the Scheme for the provider to ascertain how you can take your benefits from your AVC fund.

If the Revenue Max Lump Sum calculation performed by the AVC provider equals what the Scheme is already paying out, which is what we are assuming here, then your options for the €200k are to buy an annuity, enter into an ARF or take it as taxable cash (taxable at your marginal rate plus USC, and maybe PRSI if applicable).

I'm not straying into the area of overfunding as I'm not certain of this area. Revenue limits allow one to fund for a pension of 2/3rds of salary and a spousal pension of 100%. Your lump sum of 1.5x plus pension of 50% of final salary plus potential spousal pension of 50% gets you a good portion of the way there.
 
Thanks so much AA, that makes total sense. I thought I had found a new clever strategy lol, but should have known on this forum it would have come up many times before if it was a runner!
 
Fortune said:
This isn't always the case
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Of course, but I didn't say that it was:-

AAAContributor said:
let's keep things simple and assume.....that your final salary equals your highest 'final remuneration'
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For explanatory purposes and to try and craft a reply that is easily understood to a general readership you have to start somewhere; it's such a complex area, as well you know! I think the person my reply was directed to got the central point I was trying to make.
 
AAAContributor said:
I think the person my reply was directed to got the central point I was trying to make.
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Just realised this was to other poster.

Thanks for your previous reply. I still can’t like posts but it was very helpful.

AAAContributor said:
This is notwithstanding that you are free to go and set up a PRSA AVC by yourself with a provider of your choice.
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I think this is a key point I’m trying to clarify. I’m in the HSE. So I can go and setup a PRSA AVC of my choice (whatever company and I can choose whatever funds), but it is still linked to the SPS?

As I get an understanding of one aspect of these pensions I find more questions come up. So to try and clarify my own understanding:
  • PRSA AVC: When in the HSE and in the SPS, a “PRSA AVC” is a (pension) savings account that I setup independently of my public service employer. However, because I am in the SPS, this PRSA AVC is treated as if it is ‘tied’ to my SPS because a PRSA AVC is always tied to an occupational scheme plus it is tied because I will be paying into it from my HSE salary and claiming tax relief.
  • PRSA: This is a 100% standalone (pension) savings account that is not tied to my SPS? If I want to pay into this I can’t get tax relief on my HSE salary? To get tax relief I’d need to pay into this from my private sole trader business income.
Given I want to pay more into a pension, does being in the SPS, ‘force’ me to setup a “PRSA AVC” and not a “PRSA”? Or is it that I can setup both but I’m required to maximise payments into the PRSA AVC before I can put anything into a PRSA?

Or am I allowed to setup a “PRSA” and not a “PRSA AVC”? If I setup a “PRSA” am I allowed to pay into it from my HSE salary?

If I have a “PRSA AVC” that is ‘tied’ to my SPS, is the ‘pot’ of money in this PRSA AVC at retirement (before I take a lump sum out of it and transfer any remaining amount into an ARF), subject to the 25% max tax free rule? Or because this is tied to the SPS, this rule doesn’t apply? So using my figures of estimated €101k actual tax free lump sum at retirement from SPS, this is €79k short of the max I’m allowed of €180k (I will have 31 years service). If I have €79k in a “PRSA AVC”, can I take this full amount tax free? Or am I only allowed €19,750 (25%) with remaining 75% going into an ARF?
 
Lots of great questions. I'll have a go and am happy to be corrected.

Shreddit said:
So I can go and setup a PRSA AVC of my choice (whatever company and I can choose whatever funds), but it is still linked to the SPS?
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Yes
I had a number of emails with people like Irish Life, Standard Life (Royal London Ireland never responded to me) and the Single Pension Scheme Administrators asking this exact question. I never got a 100% satisfactory answer. But I'm 99% sure that a PRSA AVC being "tied to" or "linked to" the main occupational pension scheme (the SPS) means that:

1. It was set up with the express purpose of augmenting benefits under the SPS.
2. AVCs paid in to the PRSA AVC were done when you were employed by the HSE and came from your HSE income ONLY.
Not tied to the SPS. You cannot pay in to the PRSA using HSE salary. The best thing would be to max out your tax relief in to your HSE linked PRSA AVC. Since your income is already > 115k getting tax relief by paying in to a PRSA is a moot point as you won't have any left over. You can still contribute to the PRSA with non-HSE income but you won't get any tax relief on it. In which case you probably should not open a PRSA at all but send income from other sources in to individually held shares like an ETF or a Conglomerate like Berkshire etc..
Shreddit said:
... does being in the SPS, ‘force’ me to setup a “PRSA AVC” and not a “PRSA”? Or is it that I can setup both but I’m required to maximise payments into the PRSA AVC before I can put anything into a PRSA?
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Yes. It's something to do with pension rules... the purpose of the tax relief is to help you augment your occupational pension so Revenue require you to use AVCs from HSE income have to go in to a PRSA AVC and not a PRSA.
Shreddit said:
Or am I allowed to setup a “PRSA” and not a “PRSA AVC”? If I setup a “PRSA” am I allowed to pay into it from my HSE salary?
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No.
Not sure where the 25% is coming from? As a public sector employee the maximum tax free lump sum you can get is 1.5 times Final Salary or 200k whichever the lower.
Shreddit said:
Or because this is tied to the SPS, this rule doesn’t apply?
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I think that 25% thing doesn't apply because you are a PS worker and the rules are a bit different... as above.
Shreddit said:
If I have €79k in a “PRSA AVC”, can I take this full amount tax free? Or am I only allowed €19,750 (25%) with remaining 75% going into an ARF?
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Although the value in your PRSA AVC is separate from your accumulated SPS benefits the two are considered together and combined together the capitalised value of the total amount of pension benefit you can have from the two cannot exceed 2/3 final salary. The max amount of tax free lump sum cannot be more than 1.5 and the max amount of the regular pension benefit cannot be more than half final salary. The capitalised value of these last two might be less than the revenue max 2/3rds. Any amount in the difference could be taken as taxed cash or an ARF.

I have to admit I'm not 100% on how this last point works in practice. There is a purchase/buy back procedure to buy benefits from the SPS to bring you up to your max allowed under the Revenue rules (1.5 times and half final salary) but I don't know if you would actually need to send value from your PRSA AVC via that route in order to get your full 1.5 times final salary tax free lump sum?

There is a calculator for that on the SPS website. See Point 9 "Administrator Purchase Calculation Tool" under the Transfer section. Transfer means you transfer value from an (PRSA) AVC fund to obtain additional benefits rather than paying with cash (Purchase).

Another question worth considering is would you like to "buy back" your full SPS scheme benefits or just put all your AVC fund in to an ARF? You could argue you will already have a decent amount of guaranteed DB retirement income from 31 years of service... the tax free lump sum should always be taken regardless.

I made the attached spreadsheet to estimate your scope for making AVCs if you want to have a go.
 

Attachments

  • Calculating Max Allowed Value in an AVC Fund_AAM.xlsx
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Your AVC PRSA is subject to the rules of your occupation pension scheme.

The rules in Public Sector pensions are that the maximum lump sum is 1.5 times final salary, so this is the only type of calculation that can be applied to your AVCs

However your maximum tax free lump sum can be up to 1.5 times final remuneration. (Subject to 200k limit)

Final remuneration can be larger than final salary.

The 25% of fund value calculation is not allowed.

A 1.5 times calculation is allowed.
 
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AAAContributor said:
I need to double check a point - if you have a dual employment, you have to maximise your contributions to your Occupational Scheme first for income tax relief purposes.
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CharlieMac said:
AVCs paid in to the PRSA AVC were done when you were employed by the HSE and came from your HSE income ONLY.
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This I think is my final outstanding query. Given I’m setting up a PRSA AVC to augment my SPS pension, am I allowed to pay into the PRSA AVC from my sole trader business?

OK so I’m attempting to summarise the situation and make sure I have it all right. Aware retirement age likely to change but I need to ground my planning in some kind of figures. My focus here is purely on identifying the route to getting the most from the potential €200k tax free lump sum at retirement.

Current Personal Situation
42 years old. Aiming for retirement at 66 years. Married. Partner is in the (pre-2013) public service superannuation scheme. We have almost identical salary and salary progression.

Current Employment Situation
HSE employee post-2013. Current salary of €100k. Will reach the maximum increment for my role (final Long Service Increment (LSI)) well before retirement. The max LSI is currently €120k. Will have absolutely no additional allowances. My base salary will be my maximum final remuneration. By retirement I will have 31 years of service.

Current Pension Situation
Member of the Single Public Service Pension Scheme (SPS). Using currently available figures the Estimator Tool is giving the SPS lump sum as €101k. Based on the Revenue rule of 1.5x final remuneration for the lump sum, I will have €180k as the potential maximum lump sum figure at retirement. Given the €79k shortfall between potential (€180k) and actual (€101k) lump sum, this shortfall will have to be made up of a "PRSA AVC".

Potential to Reach €200k from Primary Salary Increases
With a max salary of €120k currently and 24 years until retirement, realistically I only need an increase in base salary of €13,333 over this period to reach €133k. Getting to €133k will increase my potential lump sum figure to the maximum €200k (133 x 1.5 = 200).

Between 2019 and 2025, the final max salary for my role has increased by ~€25k (~95k to ~120k). The minimum increase in one year was 1.7%. Using this minimum increase over 24 years (compounded) as a conservative approach, it comes to ~€179K. This seems unrealistic but who knows. My calculations suggest a yearly increase of only 0.44% in salary (compounded) would lead to €133k by retirement.

So broadly speaking, whilst pension rules may change in 24 years (the max of €200k could increase, the 1.5x salary rule could decrease), it suggests I should focus on a “PRSA AVC” and not bother with also setting up a “PRSA”.

PRSA AVC Maximums
Current salary is €100k. At 42 years, I can contribute €25k maximum per year. Any contributions to PRSA AVC will need to account for contributions to SPS. So the max is €25k minus current SPS contributions. Using the spreadsheet (from @CharlieMac), I can contribute a maximum of €1.3m into a PRSA AVC.
 
Shreddit said:
This I think is my final outstanding query. Given I’m setting up a PRSA AVC to augment my SPS pension, am I allowed to pay into the PRSA AVC from my sole trader business?
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Stop thinking "can I pay in from my sole trader business". Money is money.

What we are really talking about here is tax relief for pension contributions.

We want tax relief for putting money into a pension.

There are controls in place though for policing the application of tax relief.

These are:

1. Age-related limit (i.e. % limits)
2. Earnings limit (Section 790A)
3. Revenue Guidance: Revenue Pensions Manuals.

Where there are dual income sources such as employment income and self employed income, you must exhaust tax relief on the employment income first.

If you have scope to make AVCs and get tax relief (based on your employment income figure), but decide not to contribute to your AVC Scheme or a PRSA AVC, and instead contribute to a PRSA, technically there is no tax relief for the contribution to the PRSA (see Revenue Pension Manual Chapter 24). A member of an Occupational Scheme can only get tax relief for a contribution to a PRSA as long as it is a contribution to a 'PRSA AVC'. I accept that this is a bit nit-picky, but these are the rules.

What you have to do in your situation is contribute to the AVC Scheme or PRSA AVC, where contributions are derived from (i.e. based on) your employment income figures only and nothing else. If, after that, you still have scope for more tax relief based on your total income (with an honourable nod to the overall earnings limit), then work away to soak up any remaining scope for tax relief with a contribution to a PRSA.

If you have dual income sources and want to know more about the practical application of how tax relief operates in such situations, there are some really helpful worked examples in Revenue Pensions Manual Chapter 26.
 
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AAAContributor said:
Where there are dual income sources such as employment income and self employed income, you must exhaust tax relief on the employment income first.
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Perfect. I'm OK with nit picky, like to know what is what.

AAAContributor said:
If you have dual income sources and want to know more about the practical application of how tax relief operates in such situations, there are some really helpful worked examples in Revenue Pensions Manual Chapter 26.
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Super. Thanks for the reference. I'll get to reading that. Thanks so much, really helpful.
 
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