Treatment of Tax Free Lump Sum Overshoot

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joecoie

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If the value of an AVC overshoots the Revenue max Tax Free Lump Sum value, how is the overshoot value treated if the total value of AVC is withdrawn?

Background; SNA in pre-2013 pension scheme; joined in 2010; will have 15.6 years' service at time of retirement in Sept 2026. Looking to start & contribute to an AVC to maximise the TFLS achieved as the pension scheme LS will be lower than the max value allowed by revenue.
 
The excess can be used to supplement the pension, through an annuity or an Approved Retirement Fund, or can be withdrawn at retirement, taxed as if it was earned income.
 
Thank you Dave,
Supplementary ques-
If the overshoot amount when withdrawn at retirement is taxed as income this would potentially be at 0 or 20% as our income for tax will be very low in first year of retirement. Would it make sense & be permitted to make a high AVC contribution value now (with a year to go) when we are paying tax at 40% & get relief at that rate; then only pay 20% (worst case) on withdrawal of the overshoot? I understand there would be a small additional cost to add this additional contribution to the AVC.
 
joecoie said:
Would it make sense & be permitted to make a high AVC contribution value now (with a year to go) when we are paying tax at 40% & get relief at that rate; then only pay 20% (worst case) on withdrawal of the overshoot?
Click to expand...

Yes that's a popular reason why people invest in AVCs: to get tax relief at 40% on the contributions and pay lower rate (or possibly no) tax when withdrawing the proceeds.

Remember that there are limits on how much of an AVC you can get tax relief on. If in your 60s, it's 40% of income, less whatever contribution you're already making to the superannuation scheme. Salary for the purpose of this calculation is capped at €115,000.
 
Dave, just to confirm what I'm thinking about here is not using the AVC Tax free overshoot to fund an ARF & drawdown over time but take the overshoot at same time as the TFLS in year of retirement. Quick back of napkin calc would be; in year of retirement we could absorb
10k additional income at 0% tax
If this 10k was relieved at 40% going in to the AVC that would be [10k * 0.4] = 4k saving; am I correct?
 
Yes you would get 4k tax relief on your 10k pension contributions.
Provided in is within your yearly age related allowance.

Will you have extra income capacity at 0% in the years following your retirement year ?

If so, you could pay and claim tax relief for extra AVCs for tax year 2024, up to 31 October 2025, and take a further pension lump sum taxed at 0% in a later year.

You might need to set up an ARF or a vested PRSA to achieve this. This would be easy to set up.

You state that you don't want to drawdown from an ARF over time. You can chose any method of drawdowns.

This could be for example, 100% in one lump sum or 50% in the first year + 50% in the second year and so on.
 
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