# DB, tax free lumpsum, what happens if I lose car and bonus in years before retire?



## Robo (11 Mar 2007)

The issues raised in this thread are of interest to me.

Details:
DB scheme
Potential 40 years service
Company car and 5K bonus per year.
Age 43

As I understand it I can pay ACV contributions up to 25% of my total remuneration (including the value of the BIK on the car and the bonus)

The maximum my total pension can be is 2/3 of my final remuneration (including car bik and bonus) 

And

Max lump sum can be 1.5 times my final remuneration (including car bik and bonus).

* What happens if in the years leading up to my retirement I lose the car and the bonus for some reason?*

As I understand it my final remuneration will reduced and so will the max limits that I am entitled to. My AVC funds will bring me over the “new” revenue limits that apply. The will be new as they are based on my reduced final remuneration.

Thanks


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## Robo (15 Mar 2007)

*Re: DB, tax free lumpsum, what happens if I loose car and bounus in years before reti*

Hi
I spoke to the sales rep from the company providing my union AVC options.  ( I know he is not an independent advisor, that’s why I am looking from additional input).  According to him even if I reached the revenue limits in relation to pension pay out based on my defined benefit pension, the full AVC fund can be transferred to an ARF and funds drawn down as required. All such drawdowns will be subject standard PAYE tax at that stage. No other tax liability applies to this situation. 


Also the final remuneration amount is actually  based on the average of any three of the previous ten years, not just the last year.

Can anyone confirm that my understanding is correct.

Thanks


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## Guest126 (15 Mar 2007)

*Re: DB, tax free lumpsum, what happens if I loose car and bounus in years before retire?*

Hi Robo

No - you cannot fund over the rev max (whether it goes to ARF or not is irrelevant).

Please also note final remuneration is based on highest earnings over any three years in the ten years before NRD - so that might help you.

The revmax is 2/3rds of final salary (three year average as above) and the tax-free-cash is not in addition - the 2/3rds is the max and the tax-free-cash must come out of this.


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## Robo (15 Mar 2007)

*Re: DB, tax free lumpsum, what happens if I loose car and bounus in years before reti*

Thanks CapitalCCC. My concern is that I can not be certain that at retirement age (or event in the 10 years prior to that) I will still have a company car or my bonus. If that were to be the case, and my AVC fund then brought me over the revenue limits, what happens to my AVC fund.

Thanks again for your help.


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## Guest126 (16 Mar 2007)

*Re: DB, tax free lumpsum, what happens if I loose car and bounus in years before retire?*

It would be taxed as income - in practise what would usually happen is that as soon as you lose the car/bonus you would start paying 0% AVC (i.e. no AVC) and the impact of this would be to reduce the size of your AVC fund and you should not end up with this problem.


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## Robo (16 Mar 2007)

*Re: DB, tax free lumpsum, what happens if I loose car and bounus in years before reti*

Thanks
If it were to be taxed as income, all I am really doing is deferring the tax bill. The advantage as I see it is that my contributions will be bigger (or cost me less). Therefore the fund will grow bigger and the after tax lump will be bigger. This is in comparison to just investing any ACV contribution in investments directly. 


I am considering making AVC contributions for 2 or 3 years and stopping making contributions until I am 7 years from retirement. At that stage I will have more certainty as to my final remuneration will be in terms of calculating revenue limits.

Any commnets.


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## Guest126 (16 Mar 2007)

*Re: DB, tax free lumpsum, what happens if I loose car and bounus in years before retire?*

Main disadvantage is all taxed at higher rate at retirement (no real difference for a high earner).

Possibility of penalties if blatant overfunding going on.

Your plan to stop and review situation sounds good.


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## Omega (16 Mar 2007)

*Re: DB, tax free lumpsum, what happens if I loose car and bounus in years before retire?*

I'm not an expert in this field, but I understand that potential over-funding may be negated, to some extent, by the purchase of additional spouse's pension from a life insurance company - or the indexation of either the main persion or the spouse's, if applicable. It might be worth looking into.


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## Guest126 (16 Mar 2007)

*Re: DB, tax free lumpsum, what happens if I loose car and bounus in years before retire?*

Yes - but remember a Spouse Pension cannot exceed 100% of the member pension and the indexation max is MAX(3%, CPI) per year


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## Omega (16 Mar 2007)

*Re: DB, tax free lumpsum, what happens if I loose car and bounus in years before retire?*

Sure - but my point was that there may not be *any* provision for either indexation or a spouse's pension (or it may be something like 50% of the main one), so any potential "over-funding" could theoretically be used to purchase these provisions. It would depend on the scheme rules, etc.


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## Robo (16 Mar 2007)

*Re: DB, tax free lumpsum, what happens if I loose car and bounus in years before reti*

Thanks for all your feedback. 
My DB scheme has a related Spouses and children’s contributory pension scheme. The benefits are half my pension for my wife if I die first.  If I understand it correctly, my final AVC fund could be used to invest in an ARF which could bring my wife’s pension up to the size of the original pension prior to my death. The total actual amount extra paid out, will depend on the size of the AVC fund and the performance of the ARF. Am I correct,

What happens if my wife dies before me.

Thanks


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## Guest126 (19 Mar 2007)

*Re: DB, tax free lumpsum, what happens if I loose car and bounus in years before retire?*

Your AVC fund could go to an ARF and do whatever it wants to do there OR you could use it to buy a spouse pension & pension indexation...within the maximum limits specified earlier in the thread.

If your wife predeceases you then you will be OVER FUNDING so be wary of that.


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## Robo (19 Mar 2007)

*Re: DB, tax free lumpsum, what happens if I loose car and bounus in years before reti*

Thanks for all the info CapitalCCC. I intend to make very small contributions for the next few years and then review the situation.


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## upport (19 Mar 2007)

*Re: DB, tax free lumpsum, what happens if I loose car and bounus in years before retire?*

I'm confused.Please tell me what happens to avc fund if employee is entitled to max DB pension with 40 years service at nra 65.


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## Guest126 (20 Mar 2007)

*Re: DB, tax free lumpsum, what happens if I loose car and bounus in years before retire?*

Please read the thread upport.

If that does not answer your question - then please specify in more detail what your question is.


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## asdfg (20 Mar 2007)

*Re: DB, tax free lumpsum, what happens if I loose car and bounus in years before retire?*



> I'm confused.Please tell me what happens to avc fund if employee is entitled to max DB pension with 40 years service at nra 65.


 
Most DB schemes in the private sector only give you 2/3 of final salary which does not include notional salary BIK etc. The state pension is also deducted in full if you have 40 years service. Revenue allow you 2/3 of final salary (P60 Balancing statement etc) You can fund both of the above with ACV's. If you overfund, afaia you are effectivelly subsidising the pension scheme.


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## Guest126 (20 Mar 2007)

*Re: DB, tax free lumpsum, what happens if I loose car and bounus in years before retire?*

Even in a DB arrangement - AVC is usually on a DC basis - so there should not be any cross-subsidising taking place.


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## upport (20 Mar 2007)

*Re: DB, tax free lumpsum, what happens if I loose car and bounus in years before retire?*



asdfg said:


> Most DB schemes in the private sector only give you 2/3 of final salary which does not include notional salary BIK etc. The state pension is also deducted in full if you have 40 years service. Revenue allow you 2/3 of final salary (P60 Balancing statement etc) You can fund both of the above with ACV's. If you overfund, afaia you are effectivelly subsidising the pension scheme.


 
Thank you 'asdfg'.
If the DB scheme was in the public sector would your opinion be as above?


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## asdfg (22 Mar 2007)

Sorry. don't know a lot about the public pension schemes. I think the revenue 2/3 rule still applies. 
Some public pension schemes allow you to buy years if your expected payout is below the 40 years (Teachers pension schemes allow this.) See here and here Also some public pension schemes allow a max of 40/80 (half) with no deduction of the state pension. (If you work 30 years you get 30/80, you get 1/80 of final salary for every year service) You can use AVC to make up the difference to bring your pension up to 2/3. 
You need to check with the trustees of the scheme.


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## Guest126 (22 Mar 2007)

The Rev Max 2/3 is before a tax-free lump-sum is taken.

In public sector the "RevMax" is 40/80 pension and 120/80 lump-sum.

This is deemed the same as a "2/3" pension.

A public sector scheme does not have trustees - its rules are governed by legislation and the appropriate minister.


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## peno (22 Mar 2007)

*Re: DB, tax free lumpsum, what happens if I lose car and bonus in years before retire*

You should also possibly consider making AVCs to fund early retirement if you wished. 

My advise is to contact your pensions administer ansd  see if they will offer to provide an actuarial projection of your avc. Which can estimate the required AVC to fund rev max benefits at a range of ages before NRA.

Some companies offer this others may not due to the cost.


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## upport (22 Mar 2007)

*Re: DB, tax free lumpsum, what happens if I loose car and bounus in years before retire?*



CapitalCCC said:


> Please read the thread upport.
> 
> If that does not answer your question - then please specify in more detail what your question is.


Sorry that my question was'nt clear........if an employee in the private sector with 40 yrs service qualifies for max DB at 65,will his avc fund be paid to him or does he lose the avc fund because he has attained max defined benefit?


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## Guest126 (23 Mar 2007)

It would usually be taxed as income in year of retirement.

If blatant overfunding may be further penalised, often it is possible to find legitimate ways of using AVCs to make sure not overfunding.


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## Homer (2 Apr 2007)

*Re: DB, tax free lumpsum, what happens if I loose car and bounus in years before reti*



Robo said:


> I am considering making AVC contributions for 2 or 3 years and stopping making contributions until I am 7 years from retirement. At that stage I will have more certainty as to my final remuneration will be in terms of calculating revenue limits.
> 
> Any commnets.


 
Just to clarify earlier responses, please note that the Revenue will allow you to average remuneration over any period of three years *or longer ending *not more than ten years prior to your date of retirement. 

This means that you could take your earnings from age 52 to age 55 if you were retiring at age 65. It also means that, if your BIK etc, were to stop at (say) age 53, you could take the average from age 50 to age 55. While this would not protect you fully from the impact of the loss of BIK, etc. it would at least let you take 60% of the figure (i.e. three years BIK spread over five years averaging) into account.

Please also note that remuneration over any period ending prior to your date of retirement can be "dynamised" i.e. increased in line with inflation from the end of the year to your date of retirement, so you may have more scope than you think.

Regarding what happens if you are overfunded at your date of retirement, in theory the Revenue could insist that the excess funds are absorbed into the scheme and effectively become used by the Trustees to defray costs or provide benefits for other employees. However, in practice, Revenue will generally allow the excess to be refunded to the member through payroll (and hence subject to both marginal rate income tax and PRSI) on a case by case basis, although they could refuse to allow permission to permit such a refund if they were to judge that there had been a case of deliberate overfunding by the member.

Homer


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## aidan119 (12 Apr 2007)

*REMUNERATION*
*(Extract from Revenue Pensions Manual*​ 




*Final Remuneration*
This may be computed on one of the following bases, viz:

(I)            (a)           Basic remuneration over any twelve month period of the five years preceeding the 
                                relevant date (i.e. the date of retirement, leaving service or death as the case may be).

                PLUS

(b)                 the average of any fluctuating emoluments over three or more consecutive years 
ending on the last day used in (a) above.

(ii)                 The average of the total emoluments for any three or more consecutive years ending not
earlier than 10 years before the relevant date.

(iii)                The rate of basic pay at the relevant date or at any date within the year ending on that date within the year ending on that date plus the average of any fluctuating emoluments calculated
as  in (i) above.

Provided that

(i)                   Basis (iii) cannot be used where within three years before  the relevant date an employee

(a)                 was promoted or received a special increase in basic pay.

(b)           the total increase over the relevant three year period is greater than it would have been if the remuneration on the day of commencement of the period had been increased proportionately to the increase in the Consumer Price Index, or to increase applicable to the employment under a National Wage Agreement,  during the same three year period.

However, it is possible to agree beforehand with RBD that such increases if given on a recognised scale applicable to defined groups of arms-length employees will not prevent the availability of basis (iii).

(ii)                 Whenever _final remuneration _is calculated by reference to a year or years other than the 12 month ending with  the relevant date each such year’s remuneration may be increased in proportion to the increase in the cost of living from the last day of that year up to the relevant date referred to as “dynamised” _final remuneration_.  This also applies to fluctuating emoluments so that fluctuating emoluments of a year other than the twelve months ending with the relevant date may be increased as detailed above.

(iii)                In the case of a _20%_ “_director_-

(a)                 the scheme may not adopt either of the bases (I) or (iii) and

(b)                 Proviso (ii) above may not be applied unless it can be shown to the satisfaction of 
RBD that the amount of the non-commutable pension payable or remaining payable or payable before the application of rules permitting commutation of the whole of the benefits to the directors not less than two-thirds of the annuity equivalent of all retirement benefits payable to the director (or to which he is entitled) under all schemes of the Employer at the time any lump sum benefits are paid to him under the rules.


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