# SSIA versus pension contribution



## oldtimer (2 Oct 2006)

Once again I read in newspapers, because of the tax incentives, investing in a pension plan is even better than an SSIA. I do not agree with this.

(1) My SSIA matured lately and I got my 25% bonus tax free - no problem.

(2) Co-incidentally I retired at the same time but my AVC (to which i contributed to the max and availed of the tax savings) did not come through as smoothly. Firstly I did not get the 25% tax free lump sum of the AVC because of my personal tax situation. All brochures had stated I would get this - never stated conditions would apply. I was given three options with AVC.
          (a) Take the full value in a lump sum which would be taxed , in    other words much of the tax relief I had received would be given back.
          (b) Take an annuity which would be liable for tax
          (c) Switch to an Active Retirement Fund. The interest would be tax free but any withdrawal on the capital would be taxable.

To me stating a pension plan is better than an SSIA is a little misleading


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## ajapale (2 Oct 2006)

oldtimer said:


> To me stating a pension plan is better than an SSIA is a little misleading



I dont know who has stated that ..."a pension plan is better than an SSIA" but they are two very different things.

Did you get independant professional advice regarding your AVC's and associated tax treatment?

Would you like me to move your question/comments concerning AVC's to the pensions section?


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## bocade (2 Oct 2006)

25% tax free lump sum will not apply to an AVC amount unless you are a proprietary director. The tax free lump sum is based on years of service and final salary. AVC suggests company pension scheme. 

If you are a proprietary director can't see why you couldn't opt for the 25% tax free lump - what personal circumstances caused a problem, query this, your provider may be wrong.


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## oldtimer (2 Oct 2006)

AJAPALE - I have read it several times - latest in SSIA supplement Sunday Independent yesterday ''if you are a 42% tax ratepayer, for every 100 euro per month that you invest iin a pension plan, you will receive 42 euro back from the governement. Thats more than you got with your SSIA.''    My point is statements like that are misleading.

I worked for a semi-state company and had a financial advisor through the trade union. How can i draw on my AVC without the governemt clawing back the tax free allowances I received on contributions?

Please move this to pension section.


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## Guest126 (3 Oct 2006)

bocade said:


> If you are a proprietary director can't see why you couldn't opt for the 25% tax free lump - what personal circumstances caused a problem, query this, your provider may be wrong.


 
A proprietary director cannot take 25% of their AVC as tax-free lump-sum.

They can either:


take 150% of their final salary as a tax-free lump-sum
OR

take 25% of their total pension fund as a tax-free lump-sum (subject to max €1.25m)
They cannot 'mix and match'.


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## ajapale (3 Oct 2006)

> My point is statements like that are misleading.



I agree with you that statements like this are misleading and a little bit stupid.



> How can i draw on my AVC without the government clawing back the tax free allowances I received on contributions?


Can I suggest that we concentrate on this specific question?

When you say you worked for a semistate organisation was this with a commercial semistate organisation like the ESB, Bord Gas etc or was it with a semistate agency like Fas?

Im assuming that your main scheme was a Defined Benefit scheme? If so how many years service have you clocked up as a member?

aj


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## Guest126 (3 Oct 2006)

ajapale said:


> Can I suggest that we concentrate on this specific question?


 
Agreed - but incorrect statements need to be pointed out - if left unchallenged they shall lead to many many more questions.

In relation to the question - after OP has taken max tax-free lump-sum from pension fund, there is no other mechanism by which money can be drawn down tax-free from pension fund.
Question answered.

However, it may be possible to draw down from ARF gradually to stay within tax-free limits for a person aged 65 or over - we would need a lot more information to ascertain this.


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## ajapale (3 Oct 2006)

Sorry CCC,

I was attempting to steer the thread away from the "SSIA Vs Pension Contribution" Sunday Independent SSIA Supplement statement which is fruitless at best.

Your challenge of other statements on the thread are  well made and very relevant.

aj


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## Guest126 (3 Oct 2006)

Thanks AJ - that comment about a "pension is much better than an SSIA" also appeared in The Sunday Times on Sunday 1 Oct, I agree it is a ridiculous statement given that they are two completely different forms of investment.


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## oldtimer (3 Oct 2006)

thanks for interest re my query to date. You have hit the nail on the head - I want to know how I can draw money on my AVC without paying back the tax saved with contributions. I worked with An Post for over 40 years and contributed maximum contributions allowed @ 42% over the past 5 years. As far as I can see there is no way of drawing on that money now without the government clawing back  on tax.


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## Guest126 (3 Oct 2006)

Are you sure that you have taken your revenue maximum tax-free lump-sum (including all bonues etc...)


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## Westbound (3 Oct 2006)

The normal DB scheme (or public sector scheme) calculates your benefits on the basis of your pensionable salary or basic earnings. This is usuaully lower than your actual earnings.

In a typical public sector scheme for example you will get 3/80ths of your basic salary for each year of service as a lump sum (or gratuity) subject to a mx of 120/80ths or 1.5 times. 

The Revenue allow you use your total earnings e.g bonus, BIK, overtime to maximise the tax free lump sum and you can use your AVCs to pay this.


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## ajapale (4 Oct 2006)

Hi westwood,

Thanks for the post. I have replaced the word "_state_" with "_typical public sector_" to avoid confusion with state social welfare pensions.

In reality however there is no such thing as a '_typica_l' public sector pension scheme.

Hi oldtimer,

Is your pension indexed with CPI (inflation), indexed at a fixed rate, related to the grade/scale of job you retired from or perhaps its not indexed at all?

_Added Later:_ This quote from a Dail Debate in 2005 confirms that An Post pensions provide for "_pay parity_" (pensions are increased in line with the pay of serving staff). This  reduces your flexibility in terms of optimising your tax free lump sum.



> The existing terms of the An Post superannuation scheme provide for pay parity, that is, that pensions are increased in line with the pay of serving staff. This is in accordance with public service defined benefit pension increase policy generally, pay parity being an integral and well-established practice which is widely used in public service defined benefit pension schemes.



aj


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## badgambler (5 Oct 2006)

SSIA v Pension arguement is promoted towards investors whohave maturing SSIA's

It is a Sales Promotion and nothing else.


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## oysterman (5 Oct 2006)

oldtimer said:


> I want to know how I can draw money on my AVC without paying back the tax saved with contributions........contributed maximum contributions allowed @ 42% over the past 5 years. As far as I can see there is no way of drawing on that money now without the government clawing back  on tax.


Agree with other posters who remind you to ensure that you did get full amount of tax-free lump sum allowed by the Revenue i.e. did you get any allowances, overtime etc. accounted for?

However, that's still likely to leave you with a big AVC fund and, of course, you'll pay tax on anyting you draw down from it.

But it may still prove to have been a good deal.

In the event that you have become a basic rate taxpayer in retirement, you'll be paying income tax at 20%, having received relief at 42% when you were contributing to the fund.

If you hadn't contributed to AVCs but had used those earnings (net of tax at 42%) to invest in a similar type of fund, you'd be paying tax on any profit/earnings from it (CGT or income tax). In other words, you'd have paid 42% tax on the initial earnings that funded the investment and then more tax (20% CGT or 20% or 42% income tax) on the gains from the investment. You invested tax free and will only have to pay tax once, not the twice you would have paid if you hadn't wrapped the investment in an AVC.

If you'd put the after-tax earnings on deposit you'd likewise have been hit for tax twice....the 42% income tax in the first instance and DIRT on the interest.

(I've ignored any gains you may have made from PRSI relief which are likely to have further worked in your favour.)

So, just because you can't get it out tax free don't think that you've necessarily lost.

Where might you have lost?

Charges obviously (as ever). Given that yours was a public-service AVC scheme, I fear you'll have been stitched up by greedy (monopolistic) brokering and high charges by the provider as well.

Of course, given the high charges you probably paid to the broker, you should have been advised as to whether this was a suitable investment product for you. One of your posts implies that you may have paid into this scheme only over the last 5 years of your employment. I would argue that if you had no scope to take any of a potential fund tax free (i.e. you had no missing years of service to fund) then the fees involved would have made this a poor investment given the lack of time allowed for growth. I wonder might you have a legitimate mis-selling complaint.

Get back to the broker and look for answers to all your questions and for a plan as to what to do with your fund. If you're still unhappy it might pay you to go to a fee-based advisor for help.


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## oysterman (5 Oct 2006)

oldtimer said:


> I want to know how I can draw money on my AVC without paying back the tax saved with contributions........contributed maximum contributions allowed @ 42% over the past 5 years. As far as I can see there is no way of drawing on that money now without the government clawing back  on tax.


Agree with other posters who remind you to ensure that you did get full amount of tax-free lump sum allowed by the Revenue i.e. did you get any allowances, overtime etc. accounted for?

However, that's still likely to leave you with a big AVC fund and, of course, you'll pay tax on anyting you draw down from it.

But it may still prove to have been a good deal.

In the event that you have become a basic rate taxpayer in retirement, you'll be paying income tax at 20%, having received relief at 42% when you were contributing to the fund.

If you hadn't contributed to AVCs but had used those earnings (net of tax at 42%) to invest in a similar type of fund, you'd be paying tax on any profit/earnings from it (CGT or income tax). In other words, you'd have paid 42% tax on the initial earnings that funded the investment and then more tax (20% CGT or 20% or 42% income tax) on the gains from the investment. You invested tax free and will only have to pay tax once, not the twice you would have paid if you hadn't wrapped the investment in an AVC.

If you'd put the after-tax earnings on deposit you'd likewise have been hit for tax twice....the 42% income tax in the first instance and DIRT on the interest.

(I've ignored any gains you may have made from PRSI relief which are likely to have further worked in your favour.)

So, just because you can't get it out tax free don't think that you've necessarily lost.

Where might you have lost?

Charges obviously (as ever). Given that yours was a public-service AVC scheme, I fear you'll have been stitched up by greedy (monopolistic) brokering and high charges by the provider as well.

Of course, given the high charges you probably paid to the broker, you should have been advised as to whether this was a suitable investment product for you. You imply that you may have paid into this scheme only over the last 5 years of your employment. I would argue that if you had no scope to take any of a potential fund tax free (i.e. you had no missing years of service to fund) and if you weren't going to fall from the higher to the lower income tax band on retirement then the fees involved would have made this a poor investment given the lack of time allowed for growth. I wonder might you have a legitimate mis-selling complaint.

Get back to the broker and look for answers to all your questions and for a plan as to what to do with your fund. If you're still unhappy it might pay you to go to a fee-based advisor for help.


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## hendo (5 Oct 2006)

Is there some benefit if the retired taxpayer waits until reaching 75 years of age before drawing down some of SSIA monies put into a pension ?If one lives or can wait that long.


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## oysterman (5 Oct 2006)

hendo said:


> Is there some benefit if the retired taxpayer waits until reaching 75 years of age before drawing down some of SSIA monies put into a pension ?If one lives or can wait that long.


You'll have to give us a hint here....


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## asdfg (5 Oct 2006)

Not sure if this is correct but here goes.
As you have worked in excess of 40 years you have reached the max amount of pension allowed. Your pension is based on your annual basic wage from An Post but revenue allow a max pension of 2/3 based on P60 (which incl overtime BIK etc. Did you cut back or do little or no overtime in your final years. This is what you were contributing your AVCs to - the difference between your basic wage and the amount on your P60. 
Is the state pension deducted from your pension?
You may have overpaid into your pension and you seem to be getting this money back. In most defined benefits schemes if you overpay by way of AVC you do not get the overpayments back, the pension scheme benefits by paying out less to you.
Regardless, you should still be able to claim 1.5 times your final salary tax free with a reduced annual pension which is taxable in the normal way.


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