Exceeding lump sum limit on retirement

Discussion in 'Public sector pensions' started by Phil_space, Feb 19, 2016.

  1. Phil_space

    Phil_space Frequent Poster

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    I'm a class 'D' pre-1995 PS employee. I will be short of 40 years service on retirement, and have been buying back some years through the NSP scheme. I'm considering taking out an AVC to boost my tax-free lump sum on retirement. Obviously my 'employer' will award me a tax-free lump sum of max 1.5 times my final salary.

    My query is, if the accumulated AVC fund plus my actual lump exceeded the 1.5 times salary max could I take all of it tax free? Simple example. Let's say my final salary is 50k, so with full service (40 years) I would be entitled to a max tax-free lump sum of 75K. However, let's say I have 30 years service - my lump sum will be (50000 * 3/80 * 30 = 56250). If my AVC fund was worth 25k on retirement, could I take this in addition to my lump sum and get all of it (56250 + 25000 = 81250) tax-free? The pensions authority website seems to suggest that the first 200k of pension lump sums is tax free so I was wondering if this would apply in my hypothetical case above.

    Thanks for any advice.

    Phil
     
  2. oysterman

    oysterman Frequent Poster

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    Last edited: Feb 20, 2016
    Your scheme provides for a maximum (currently tax free) lump sum of 1.5 x final salary...albeit treatment of any allowances in your salary involves some averaging.

    The purpose of an AVC is largely to make up entitlements that you miss out on through lack of service.

    In your above example you could draw down from your AVC fund at retirement a lump sum of 75000 - 56250 = €18,750.

    There is, of course, scope for significant AVC funding beyond that level but do be sure not to exceed Revenue limits.

    For what it's worth, and this is merely a personal view, I'm dubious about about the value PS scheme members get from AVC contributions (beyond maximising retirement lump sums) except in funding for the 50% drop in pension to a surviving spouse (with no pension of their own) on death; in the common case of two public servants married to each other I can't see the point.
     
    Last edited: Feb 20, 2016
  3. Slim

    Slim Frequent Poster

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    Hi Phil. This is an area I have been looking at. I was under the impresion you could only take a max 25% of the Avc/prsa as additional lump sum. However, Cornmarket are offering a 'last minute avc' to boost lump sum, but based on final salary before Croke Park & Haddington Road etc. That involves drawing down thw whole avc, minus fees. I haven't yet contacted them to check it out though.
     
  4. Conan

    Conan Frequent Poster

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    If you are a member of a defined Benefit scheme (as with Civil Setvants) then any AVC fund must be used in conjunction with the main scheme benefits. So the most tax effective use is to maximise the tax free lump sum. Under Revenue rules the max tax free lump sum is 150% of "Final Salary". But Final Salary can be defined in a number of ways:
    - salary at retirement
    - average earnings over last 3 years
    - average of any 3 consecutive years ending within 10 years of retirement.

    The Covil Service scheme will only pay a lump sum of of 150% if you have 40 years service. But so long as you have at least 20 years service you can get 150% under revenue rules. So using an AVC fund to bridge the gap is very tax effective. That's where last minute AVC's can work well.
    But even if you have 40 years service, you may still not get the Revenue max due to salary reductions over recent years or if you have some income that is non- pensionable (e.g. Overtime, allowances etc).
    So if your AVC fund equals the tax free lump sum shortfall then you can take all the AVC fund as an additional lump sum.
    But you can only get a maximum of 150% as a tax free lump sum. You cannot take 150% from the main scheme + 25% of the AVC fund.
    Any excess remaining in the AVC fund after maximising the lump sum can either be used by:
    - buying an additional annuity
    - investing in an ARF
    - take as a taxable amount
     
  5. Phil_space

    Phil_space Frequent Poster

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    All,

    Thanks everyone for your advice. TBH I am dubious about the AVC scheme as it's presented by Cornmarket but feel I'm potentially missing out on some tax benefits. However, the last-minute AVC option looks a good one to make up the lump sum differential. Slim if you have any conversations with Cornmarket in this regard, perhaps you could let us know.

    Cheers,

    Phil
     
  6. Slim

    Slim Frequent Poster

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    Just seeing this now, Phil. My wife has a private PRSA with Zurich to make up a shortfall in service at retirement. I, on the other hand, will have 40 years + but, to my surprise, I could take out a 'last minute AVC' with Cornmarket to maximise lump sum. Otherwise, I wouldn't be interested in them. I will report back if I find out much more. Conan's post above sums it up well.
     
  7. Marion

    Marion Moderator

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    What is the situation in relation to a Last Minute AVC for somebody who has 43 years service as a teacher - 3 years over the required 40 years for retirement. They retire as required at 65 as a pre 95 employee. Say final retirement salary is 75,000 based on Conan's post above.

    How can they (currently) benefit from Revenue in relation to a Last minute AVC? They don't pay into an AVC.

    Marion
     
  8. Gordon Gekko

    Gordon Gekko Frequent Poster

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    I also have a question...take an example of a 35 year old public servant who can retire at 60 with 40 years of service and a full pension of 40/80ths of final salary plus a lump sum of 120/80ths.

    Does it make sense for him/her to fund AVCs with a view to building an ARF?
     
  9. Slim

    Slim Frequent Poster

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    To both Marion & Gordon..with full service and entitlement, it only makes sense because of paycuts over the last few years. Max retirement lump sum and pension would have been higher but for the cuts. You can use the avc to make up the difference.
     
  10. Marion

    Marion Moderator

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    Thank you Slim.

    I have found this document online this and it seems that they can also use the additional 3 years worked to enhance their lump sum.


    http://www.ahcps.ie/_fileupload/How to maximise your tax free cash at retirement.pdf

    Scenario 3)
    • Public sector employee with 43 years at age 65 has scope to fund for additional tax free cash. (Salary of €100,000).


    BEFORE RETIREMENT
    Actual gratuity €150,000
    From superannuation scheme
    (40/80th x 3 x €100,000)

    Revenue Limits
    (43/80th x 3 x €100,000) €161,250
    Scope for last minute AVC: € 11,250.

    Max ever allowed in this situation is 15/80th gratuity extra.


    TAX RELIEF
    IN ADDITION: The employee can then submit a tax return form to Revenue for €11,250 (assuming tax at the higher rate of 41% and PRSI at 4.9%) and can get a cheque back for €5,163. In other words, as well as maximising his/her tax free cash, the employee would make a saving of 45.9% i.e. €5,163) on the amount invested in the AVC as full tax relief is allowed by the Revenue.
    The real cost to fund €11,250 is €6,340

    Marion
     
  11. Gordon Gekko

    Gordon Gekko Frequent Poster

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    Thanks Slim. Sorry, but I'm still not clear.

    If someone is on €100k pa, has been for 40 years, and she retires, I'm clear that she gets €150k tax free and €50k pa.

    If separately, she has been making AVCs, do all of the AVCs go into an ARF?

    Thanks.
     
  12. Slim

    Slim Frequent Poster

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    If she is a public servant, her pay will have been cut twice in the last 5 years. Therefore, her lump sum and pension will be somewhat less than they would have been had there been no cuts. Revenue allows the retiree to take into account the higher amounts and supplement them with the AVC. I can't answer about the ARF although l suspect once the lump sum is extracted, the ARF is formed for the balance.
     
  13. Gordon Gekko

    Gordon Gekko Frequent Poster

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    Thanks. I'm projecting into the future, at which time the salary cuts will have dropped off the radar. Her husband is maxing out his AVCs (private sector) and together they have capacity to fund AVCs for her also. The issue is whether they should.
     
  14. Slim

    Slim Frequent Poster

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    OK, gotcha! I suppose an AVC will offer options for early retirement, maximise tax relief and allow them to top up their pensions.
     
    Gordon Gekko likes this.
  15. TheJackal

    TheJackal Frequent Poster

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    I'm confused by this. Say you retire pre 1995 public servant with 40 years at 100K you get the 150K tax free lump sum. You also have 20K in an AVC.

    Revenue website tells me the first 200K is tax free.

    As and from 1 January 2011, the maximum tax-free amount of a retirement
    lump sums is €200,000. This tax-free amount is a lifetime limit and
    encompasses all retirement lump sums paid to an individual on or after 7
    December 2005.

    So should you not get all of your 170K lumps sums from the two schemes completely tax free?
     
  16. Slim

    Slim Frequent Poster

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    No, but your maximum lump sum (from any source) would be your best salary averaged over 3 years in the last 10. So, as a public servant, you will have suffered some (2) pay cuts and therefore, your potential max lump sum (and pension) will not be achieved. You can restore that by taking out a PRSA or last minute AVC. The bother of this may not be particularly worth it if you have max service at retirement but there may be some room for enhancing your lump sum. Fees about €500..
     
  17. mula

    mula Frequent Poster

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    Last edited: Aug 18, 2016
    Don't forget you can apply dynamisation to the best 3 consecutive years in the last 10 when working out the best average salary.
     
    Last edited: Aug 18, 2016
  18. boltownes

    boltownes Registered User

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    "Max ever allowed in this situation is 15/80th gratuity extra". Does this mean the max using this example would be 15/80 x €150,000 = €28,125?