Understanding AVCs, contribution limits (overfunding), tax relief

[CryHard]

I'll preface this saying that I personally am in private employment with a PRSA but this post is about my wife which is a nurse in a public hospital.

For the past few days I've been trying to understand how pensions work for people under the Single Public Service Pension Scheme with regards to opening an AVC (or a PRSA AVC).

My wife like mentioned is a nurse, 33 years old on ~ 60k/year full time and she's been working for 6 years now. She has not contributed to any pension until now.

While reading online I ran over the following things:

a) section 5.7 of https:// revenue.ie/en/tax-professionals/tdm/pensions/chapter-05.pdf which states:

"Care must be taken to ensure that overfunding does not occur, as surplus funds may have to be refunded to the employer and taxed as a trading receipt."

b) section 6.4 of https:// revenue. ie/en/tax-professionals/tdm/pensions/chapter-06.pdf which states:

"The aggregate benefits payable on retirement to an employee who retires at normal
retirement age after 40 or more years' service with the same employer, when expressed as
an annual amount payable for life (or for life subject to a guaranteed minimum period not
exceeding ten years) and taking into account any benefits paid as lump sums, should not
exceed two-thirds of final remuneration on retirement (section 772(3)(a) Taxes
Consolidation Act 1997 (TCA)."

c) assuming full 40 years of service and assuming the same 60k/year salary she'd get 30k - 13k (current state pension) = 17k pension from work and lump sum of 1.5 x average salary during career which would be 60k *1.5 = 90k euro.

Now what I would like is a response to the following questions:

1. If she was to open an AVC / PRSA AVC, how would one calculate the maximum pension pot to not run into point a above (risk of overfunding)?
2. According to point B, somehow even if (for example's sake) her pension pot is 10 million euro, she would only be able to pay herself a maximum of 2/3s of her salary of 60k ( around 40k ) per year? This can't be correct, right?
3. If she were to retire early (say 55), after the tax free lump-sum, would she be able to move the (PRSA) AVC into an ARF? I read somewhere that since the single scheme is a defined benefit scheme, this was not an option and the only alternative is an annuity ?
4. Can she retire early with no penalty in regards to the (PRSA) AVC she opened?

Please let me know if you need more details.

 

[Dave Vanian]

If she was to open an AVC / PRSA AVC, how would one calculate the maximum pension pot to not run into point a above (risk of overfunding)?

Get an estimate of her benefits at retirement from the Single scheme. Then get an estimate of her benefits from her proposed PRSA AVC. Make sure that the two combined don't exceed the limits.

According to point B, somehow even if (for example's sake) her pension pot is 10 million euro, she would only be able to pay herself a maximum of 2/3s of her salary of 60k ( around 40k ) per year? This can't be correct, right?

It's her salary at retirement which will presumably be higher, but in a nutshell, that's it. That's the upper limit.

If she were to retire early (say 55), after the tax free lump-sum, would she be able to move the (PRSA) AVC into an ARF?

She can move a PRSA AVC into an ARF.

I read somewhere that since the single scheme is a defined benefit scheme, this was not an option and the only alternative is an annuity ?

She can't do anything with the benefits from the Single Scheme itself other than take them in the form the scheme offers. But she has options regarding her PRSA AVC.

Can she retire early with no penalty in regards to the (PRSA) AVC she opened?

Yes. Early exit penalties are banned with any PRSA contract including PRSA AVCs. She must be retiring early from the Single Scheme at the same time.

 

[CryHard]

Thank you @Dave Vanian for the reply!

The only thing unclear here is when you say:

Get an estimate of her benefits at retirement from the Single scheme. Then get an estimate of her benefits from her proposed PRSA AVC. Make sure that the two combined don't exceed the limits.

In this context, how would I know what the upper limits are?

It's her salary at retirement which will presumably be higher, but in a nutshell, that's it. That's the upper limit.

This seems incredibly punitive when compared to someone in private employment which could potentially withdraw any amount of money from their vested PRSA / ARF. In fact according to the revenue manual chapter 6 I quoted, it would seem this applies to anyone in both Defined Contribution and Defined Benefit schemes. The only people except here is those that have a normal PRSA. Is this correct?

I found the attached document from irish life, please see section 3.3 on Maximum benefits.

 

[S class]

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[Dublin85]

Cryhard,
my wife and I are both public sector. we both contribute AVCs. I'm pre 2013 defined benefit. she is post 2013 defined contribution.

as I understand it, the maximum either of us can get with our tax free lump sum is 1.5 times our final Salary. seems a bit unfair when private sector can get up to 200k tax free but I'm guaranteed a certain income when I retire

 

[Dave Vanian]

seems a bit unfair when private sector can get up to 200k tax free

Private sector can only get the greater of 1.5 x salary or 25% of accumulated fund, to a MAXIMUM of €200,000 tax-free.

So to get €200,000 you'd need to be on a salary of over €133,000 and have long service with the employer, or have accumulated a fund of over €800,000.

 

[Dublin85]

ah I see. thanks for clearing that up for.me. I had thought that if they have a large avc fund that they could take up to 200k tax free, regardless of salary.