# AVC overfunding question



## bigred (27 Sep 2007)

I'm unsure how to determine if I am possibly overfunding my pension. In summary:


30 years old and make 20% AVC. Salary 75k.
Company pays 13% on top of this which will increase gradually to 22% if I stay to retirement age
Have build up EUR 50k AVC pot already
Normal retirement age is 65 but I'd like to think I could be out of there between 55 and 60!
I know theres the max 2/3 rule and 1.5 times final salary lump sum so should I still continue to make the full AVC contribution (assuming the trustee doesnt call me up and tell me to stop!). What happens if I overfund? Can I put the balance into a ARF? or just pay the tax and take it at retirement?

Any comments appreciated.


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## asdfg (28 Sep 2007)

Is it a Defined Benefits scheme or a Defined Contributions Scheme? 

It looks like you are overproviding. You should talk to the trustees or a pensions advisor / actuary who may be able to advise. 

See the calculator from the pensions board Read the assumptions carefully. 

Also bear in mind that your salary may increase greater than the 3% per annum. What happens if you get a big promotion?  



> I know theres the max 2/3 rule and 1.5 times final salary lump sum


 
The max allowed by revenue is 2/3. Within this 2/3 rule you can elect to take up to 1.5 times final salary which is tax free so your annual pension will be reduced. Not sure how this is calc in a DC scheme. 



> What happens if I overfund? Can I put the balance into a ARF? or just pay the tax and take it at retirement?


Provided there is no deliberate action to overprovide you just pay the tax when you draw it down. You may be forced to draw it down if the acturies notice it.


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## bigred (28 Sep 2007)

thanks asdfg.. its a defined contribution scheme.. in additon to my AVC pool of 50k there is EUR 30k built up in my main scheme. Good point re the salary..


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## Dave Vanian (28 Sep 2007)

Are you married?  (That's not a proposition in case Mrs. Vanian is reading, although I'm sure you're lovely and the makings of a delightful spouse for somebody).  If you're married at retirement, you can fund for a 2/3 pension for yourself, with 100% of your pension going to your spouse in the event of your death after retirement and escalation on pensions during payment.  Such a pension is hideously expensive to provide.  At age 30 it's not unknown for a contribution rate of 100% of salary to be approvable, so I'd say you're fine.  See [broken link removed]


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## rmelly (29 Sep 2007)

why not continue to pay 20% for 10 years to reduce the long term amount you will need to pay in, then reassess downwards if required. the more you pay in earlier, the less you need to pay for the same benefit...


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## bigred (1 Oct 2007)

All very helpful. Thank you.


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## ixtlan (2 Oct 2007)

I'm confused.

If you are putting 20% into AVCs and the company 13%, that's 33%. Currently at your age you are only entitled to 20% tax-free input.

If that's correct you should find another home for that 13%. That is, some kind of pension like fund that gives you a good return. Why? Because you will have more flexibility in case you ever need the money.

Maybe I'm missing something?

As regards the overfunding, again I may be incorrect, but isn't the concept of overfunding kind of irrelevant for a DC scheme, other than arguments about whether you need that level of income and can afford the payments. What I mean is you cannot lose any money, whereas I think there were certain scenarios in DB schemes where you really could overfund and lose money (or more acccurately not get extra benefits for the extra money).

Ix.


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## Squonk (2 Oct 2007)

If you are paying in 33% then you will owe the tax-man some money right now (max tax free contribution is 20%).


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## asdfg (2 Oct 2007)

> If you are putting 20% into AVCs and the company 13%, that's 33%. Currently at your age you are only entitled to 20% tax-free input.


What the company puts into the pension fund is irrelevant in relation to what you can contribute. 
The AVC fund is an add on to the main pension fund 
You can contribute up to 20% to the AVC based on your age. Your company and sometimes you are contributing to the company pension fund
If you are not contributing to the pension fund i.e. the company is making all the contributions then you are within your rights to contribute 20% to an AVC. If however, you contribute 5% to the company pension fund they you can only contribute an additional 15% to an AVC    



> If you are paying in 33% then you will owe the tax-man some money right now (max tax free contribution is 20%).


I'm confused

max amount that *you* can contribute is 20% of salary (P60 figure) in order to get tax relief. As already mentioned your company can contribute as well.


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## Squonk (2 Oct 2007)

My understanding is that the max contribution that is tax-free is AVC + Company Pension Contribution e.g. the company contributes 3% meaning that you can only contribute 17% tax free (for a 20% max given the OP's age)


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## LDFerguson (2 Oct 2007)

Squonk said:


> My understanding is that the max contribution that is tax-free is AVC + Company Pension Contribution e.g. the company contributes 3% meaning that you can only contribute 17% tax free (for a 20% max given the OP's age)


 
Big Red is a member of an Occupational Pension Scheme as s/he refers to AVCs, final salary rules etc.  As such s/he can contribute 20% personally and the employer can contribute a much larger amount on top of this.  

If it was a PRSA scheme, the maximum would be 20% including employer contributions.


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## ixtlan (3 Oct 2007)

bigred has already said this is a defined contribution scheme, NOT an occupational/DB one. AVCs do NOT imply a DB scheme. My PRSA/company also uses the term AVC for some of my contributions.

As such I still think 20% is the max tax-free contribution, including company contributions.

That is the case for my PRSA. Isn't it the case for any other DC schemes?

Would bigred like to come back and clarify the situation? I think he is confused as the 2/3 rule is for a DB.

Some time later... OK... I spoke to a guy who knows more than me. I am wrong. My confusion arises from the fact that a PRSA is not really a defined contribution. This isn't clearly reflected in the sticky threads.

Ix.


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## bigred (3 Oct 2007)

the 13% is 100% paid by my employer / the company so I should be ok with the 20% AVC. thanks to all for the input.


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## LDFerguson (3 Oct 2007)

ixtlan, 

An Occupational Pension Scheme can be either Defined Benefit or Defined Contribution.  Either way, even if the employee is contributing 20% while in their 30s, there is still scope for the employer to contribute more on top of this.  

The term AVC is generally used to describe Additional Voluntary Contributions to supplement benefits provided by an Occupational Pension Scheme.

The 2/3 rule applies to all Occupational Pension Schemes, whether they are Defined Contribution or Defined Benefit.  It does not apply to PRSAs, except where a PRSA is being used as an AVC vehicle to supplement benefits provided by an Occupational Pension Scheme.


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