# Contributing more than 150% to AVC for 40% tax payer



## Logo (14 Feb 2019)

Retirement is within the next five years with a DB pension, 20+ years of service and having contributed AVCs to allow a retirement lump sum of 150% of revenue max limit and in 40% tax bracket. I'm wondering if there is any financial benefit in continued investment in AVCs? Just matching company 4% at the minute.
Thanks in advance.


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## Conan (14 Feb 2019)

The max retirement lump sum is 150% of Final Salary (inclusive of any BIK, bonuses etc) provided you have at least 20 years service. So using an AVC pot to top up what the scheme provides to the 150% figure makes sense, very tax-effective.


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## Logo (14 Feb 2019)

Thanks for your prompt reply Conan. I assume that the Final Salary figure from the P60 (gross pay less any superannuation contributions allowable for income tax purposes) will include declared BIK, bonuses etc. So there is no financial benefit in my continued AVC payments to match the employers 4%?


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## Conan (14 Feb 2019)

Certainly investing AVCs to maximize the retirement lump sum is very tax effective. I am not clear on the 4%+4%. If you are in a DB scheme are you saying that the Employer will match your 4% AVC as an additional contribution to a DC scheme? This seems unusual.
Whilst it is arguable that you should contribute AVCs to fund additional Pension income (as opposed to only contributing to maximize the lump sum) if that additional pension income is going to be taxed at 40% + 4% USC, if you are saying that the Employer WILL match that 4% into an additional DC scheme, then it may be worthwhile investing the 4% AVC in order to get the additional 4% from the Employer.
But you need to clarify whether the potential 4% from the Employer is in addition to what it contributes to the DB scheme?


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## Logo (14 Feb 2019)

Thanks Conan for the reply. I will have to check that out.


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## Chancer (23 Mar 2019)

Not sure if this the right thread or whatever to ask in but;
I'm in an occupational DB scheme and I've worked up the maximum 40 years service which entitles me to 1.5xfinal salary (about 90K). I've also got about 100K in AVCs.
1) Can I take the full AVC balance tax free in a lump when I retire as the total lump sum will be less than 200K?
Or
2) Is the AVC fund like a separate DC fund and I can only take 25% of its value as a tax free lump sum?
Or
3) Can I only take 1.5x final salary as a tax free lump sum?

I've been able to find revenue stuff about "Excess lump sums" where lump sum taken is > 200K, but I cant find anything about "excess lump sums" where the lump sum is > 1.5xannual salary but less than 200k. It certainly seems that an occup pens scheme has to give lump sums <=1.5 final salary for the scheme to remain revenue-approved, but it's not clear that the total amount an individual in an occupational scheme can get in total pension lumps is 1.5xfinal salary or 200k whichever is the lesser.
What if I left my current employment and started a 3rd fund, and ended up retiring for some reason, at half my current annual pay, (say 30K) would my tax free lump sum from all 3 pensions be restricted to 1.5x30k = 45K? Doesn't seem likely????

Basically what Im asking is; Is the max tax free lump sum 200K plain and simple, or could it be less depending on exactly what your final salary, or years at work, were?


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## Bladerunner (16 Jun 2019)

Basically what Im asking is; Is the max tax free lump sum 200K plain and simple, or could it be less depending on exactly what your final salary, or years at work, were?
[/QUOTE]
Just curious as similar to my own circumstances if there is answer or advice on this question


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## Oisin19 (16 Jun 2019)

your getting confused between max lump sum and the taxation of it. The max lump sum is 1.5 times salary of which 200k is the max tax free. the balance will be taxable.

Suppose salary is 200k. That would give a max lump sum of 300k. Of this amount is 200k is tax free and the balance of 100k will be taxed at 20% so net lump sum will be 280k.


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## Bladerunner (16 Jun 2019)

Suppose the salary was 60k. 1.5 times of this is 90k assuming full service. Can an AVC be used to fund the difference between 90k and 200k.


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## Oisin19 (16 Jun 2019)

No. the max is 90k in your example. Assuming scheme pays you full 90 your AVC's would be transferred to an ARF


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## Oisin19 (16 Jun 2019)

You should check if there is a difference between pensionable salary and total remuneration. If there is then you could take the extra lump sum from the AVC.


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## Steven Barrett (20 Jun 2019)

Bladerunner said:


> Suppose the salary was 60k. 1.5 times of this is 90k assuming full service. Can an AVC be used to fund the difference between 90k and 200k.



As Fergal has said, if you are using the percentage of salary method of calculating your tax free lump sum, it is precisely that, based on your final salary and years service. If you go this route, you must purchase an annuity with the remainder. 

To confuse the matter, say you are on €60,000 and have a pension pot of €800,000 at retirement. In that scenario, you have the option of taking 25% of the value of the pot ie €200,000 tax free. The remainder must be invested in an ARF. 

And remember, the maximum tax free lump sum is €200,000. An additional €300,000 can be taken with a once off tax rate of 20%.


Steven
www.bluewaterfp.ie


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## moneymakeover (20 Jun 2019)

That only confuses me more

Before your post I assumed the max lump sum was

Lesser of(1.5 times final salary, 25% total fund)

But now your saying I can take 25% regardless of salary if I choose annuity?


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## Conan (20 Jun 2019)

Assuming you are in a DC scheme, you can take a lump sum of either:
- 25% of Fund, or
- 150% of Salary
In many cases maximizing the lump sum (tax free up to €200,000) may be the most tax effective strategy. But if that is the 150% of Salary, then you must buy an Annuity with the remaining Fund (if any).
If you go the 25% of Fund route, then you can either buy an Annuity, invest in an ARF or a mix of both.
Also worth mentioning that if the 150% exhausts the fund, then so be it. Remember that any funds used to but an income (ARF or Annuity) will potentially be taxable, whereas the lump sum up to €200,000 is tax-free.


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## moneymakeover (20 Jun 2019)

Charteredaccountants.Ie



> Tax-free lump sum: the maximum tax-free lump sum that can be taken on retirement is 25% of the value of the fund in the year of payment. This is subject to a lifetime limit of €200,000. Any excess pension lump sum over €200,000 will be subject to income tax with the next €300,000 taxed at 20% and the balance taxed at 48% (40% income tax and 8% USC). If you are a member of an occupational pension scheme, you can take a tax-free lump sum based on your salary and service with the employer up to a maximum of 1.5 times your salary (subject to the overall maximum of €200,000).


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## moneymakeover (20 Jun 2019)

I still don't see where it says you MUST take an *annuity*




> *Tax*
> *Tax on lump sums at retirement*
> The first €200,000 of pension lump sums payable is currently (2016) tax free. This is a total lifetime limit even if lump sums are taken at different times and from different pension arrangements. Lump sums between €200,001 and €500,000 are taxed at 20%, with any balance over this amount taxed at your marginal rate and subject to the Universal Social Charge.
> The amount of cash you can take out of a pension arrangement is limited, with different rules applying depending on the type of arrangement you have.
> ...


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## Conan (20 Jun 2019)

It’s Revenue practice. See Revenue Pensions Manual. Your excerpt purely deals with how the lump sum might be calculated.


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## Oisin19 (20 Jun 2019)

that document doesn't deal with retirement pension options. It just deals with the taxation of lump sums at retirement. This is where the confusion lies.

On retirement from an occupational scheme you get two options as follows:
1) Annuity Option
2) ARF Option

The lump sum is calculated differently in each case as follows:

1) Max 150% of salary and balance must buy an annuity
2) 25% Lump sum and transfer to an ARF


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## Sarenco (20 Jun 2019)

Quick question - 

If somebody joins the public service mid-career and already has private pension savings can that amount be used as a lump sum on retirement?


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## Oisin19 (20 Jun 2019)

You can only use AVC's for that purpose on retirement. Your previous pension benefits are also retained benefits and can't be transferred to the public service scheme. 

You should check the rules of the scheme just in case.


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## Sarenco (20 Jun 2019)

Thanks - public sector pensions have always been a complete mystery to me!

So, somebody in that circumstance could take 25% of their private pension as a tax-free lump sum, plus whatever lump sum their public sector schme allows for (together with any AVCs), subject to the €200k tax free cap.  Does that sound right?


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## Steven Barrett (21 Jun 2019)

Sarenco said:


> Thanks - public sector pensions have always been a complete mystery to me!
> 
> So, somebody in that circumstance could take 25% of their private pension as a tax-free lump sum, plus whatever lump sum their public sector schme allows for (together with any AVCs), subject to the €200k tax free cap.  Does that sound right?



The two of them are dealt with separately and what you say it correct. It it is irrelevant if it's public sector. If you joined Facebook and were part of their company pension scheme, the same rules would apply. 

The Revenue should update their rules with regards to company pensions. When the calculations of lump sums were created, it was with DB pensions in mind. Now, unless in the PS, they are more or less gone for new members. All DC schemes should have a lump sum of 25% of fund value and annuity, ARF or taxable lump sum with the remainder. None of this 1.5 times salary and annuity or 25% lump sum and ARF/ taxable lump sum. 


Steven
www.bluewaterfp.ie


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## Steven Barrett (21 Jun 2019)

moneymakeover said:


> That only confuses me more
> 
> Before your post I assumed the max lump sum was
> 
> ...



That's because it doesn't make any sense!


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