# How much to put into AVCs



## marygl (14 Jul 2020)

I am a 45 year old public sector worker and will not have full service achieved by retirement age. I am planning to start doing AVC's to bring my lump sum at retirement age to the maximum allowable. I was looking for advice please on whether it is advisable to increase further that is allowable with AVC's to create a post retirement pension pot?

The only debt we have is mortgage and we are saving monthly, so I would have the funds to do these additional AVCs. 

Otherwise the savings would be used to buy stocks or pay an additional amount off the mortgage monthly.
Many thanks for any advice on this.


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## lledlledlled (14 Jul 2020)

marygl said:


> I am a 45 year old public sector worker and will not have full service achieved by retirement age. I am planning to start doing AVC's to bring my lump sum at retirement age to the maximum allowable. I was looking for advice please on whether it is advisable to increase further that is allowable with AVC's to create a post retirement pension pot?
> 
> The only debt we have is mortgage and we are saving monthly, so I would have the funds to do these additional AVCs.
> 
> ...



I'm not an expert by any means but you may be able to buy back Notional Service for the years you are missing for a full pension.


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## marygl (14 Jul 2020)

Thank you, yes I have managed to buy back approximately a year from when I did short term contracts


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## LDFerguson (14 Jul 2020)

Having maximised the tax-free lump sum, the question of whether or not to supplement your pension itself is mainly answered by looking at your tax position, now and in retirement.  The primary incentive for you to put money away into an AVC rather than save or invest money elsewhere is the tax relief.  But any additional pension will be assessable for tax.  So you need to try to estimate what rate of tax you'll be paying in retirement.  Add up all pensions, include the State Pension if applicable, any rental income, any dividend income that you're likely to have in retirement and see if it all ads up to paying zero Income Tax, 20% Income Tax or 40% Income Tax.  

If you're paying 40% tax now, you'll get 40% tax relief on AVCs.  If you're going to be paying zero or 20% tax in retirement, then it makes sense.  If you're going to be paying 40% tax in retirement, then it doesn't really make sense to add more to your AVCs than will maximise your tax-free lump sum.  

Regards, 
Liam
www.ferga.com


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## marygl (14 Jul 2020)

Many Thanks for this Liam, thats extremely helpful and very clear advice.
I should be in receipt of  a state pension and small UK pension at retirement, but have few investments . I will look into the value of these pensions and estimate the possible tax rate.
Many thanks again, greatly appreciated


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## Gordon Gekko (14 Jul 2020)

LDFerguson said:


> Having maximised the tax-free lump sum, the question of whether or not to supplement your pension itself is mainly answered by looking at your tax position, now and in retirement.  The primary incentive for you to put money away into an AVC rather than save or invest money elsewhere is the tax relief.  But any additional pension will be assessable for tax.  So you need to try to estimate what rate of tax you'll be paying in retirement.  Add up all pensions, include the State Pension if applicable, any rental income, any dividend income that you're likely to have in retirement and see if it all ads up to paying zero Income Tax, 20% Income Tax or 40% Income Tax.
> 
> If you're paying 40% tax now, you'll get 40% tax relief on AVCs.  If you're going to be paying zero or 20% tax in retirement, then it makes sense.  If you're going to be paying 40% tax in retirement, then it doesn't really make sense to add more to your AVCs than will maximise your tax-free lump sum.
> 
> ...



Hi Liam,

I don’t really follow the logic.

Paying tax at the higher rate in retirement shouldn’t be a barrier to contributing to a pension structure today.

A 40%/20% arbitrage isn’t the main reason to contribute to a pension. It’s the tax-free compounding of the investment returns that’s the kicker.


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## GSheehy (15 Jul 2020)

I don't have a current calculation but, as at September 2019 a married couple, both in receipt of State Pension + another pension income of €24,000 pa (total €48,481.60) would have an effective tax on income of 9%. 

Tax exemption for over 65s is currently €36,000 (married or in civil partnership). Half that for single/widowed. 

If that combined income was €72,481.60 then the effective tax on income would be 19%.   


Gerard

www.prsa.ie


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## Conan (15 Jul 2020)

GSheehy said:


> I don't have a current calculation but, as at September 2019 a married couple, both in receipt of State Pension + another pension income of €24,000 pa (total €48,481.60) would have an effective tax on income of 9%.
> 
> Tax exemption for over 65s is currently €36,000 (married or in civil partnership). Half that for single/widowed.
> 
> ...


But the marginal tax rate would be 40% +USC on the extra pension generated by the AVCs.


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## Marc (15 Jul 2020)

Taxation Basics: Marginal vs Average Tax Rates - Everlake
					

Misunderstandings about two different types of tax rates often create confusion in discussions about taxes and pension planning.




					globalwealth.ie


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## Gordon Gekko (15 Jul 2020)

I don’t follow the logic of talking about effective rates of tax at all.

If I’m considering whether to generate additional income or not, the marginal rate is all that’s relevant.


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## Early Riser (15 Jul 2020)

Conan said:


> But the marginal tax rate would be 40% +USC on the extra pension generated by the AVCs.



Plus PRSI on any drawdown from an ARF before 66.


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## 50andOut (16 Jul 2020)

Gordon Gekko said:


> I don’t follow the logic of talking about effective rates of tax at all.
> 
> If I’m considering whether to generate additional income or not, the marginal rate is all that’s relevant.



Hi GG

For me when I view what my potential total pension income will be - I just focus on the potential total capital amount at x point in time based on the annual additions (A set % of Sal, plus whatever fund growth is achieved), as I want to maximise this up to the €2m target. 

In my planning spreadsheet I have various different assumptions which I can change and they will feed into the year by year inc/exp table which goes all the way to 100 years. - Retirement date, PRSA growth rate for example.

At whatever pension age I plug into my assumption table, the 4%/5% drawdown amount (net of 20% tax) of the Pension total at that point in time replaces my net Salary in the Inc field. Since the effective rate averages out at around 20% at the higher end of a pension (based on below link), I feel this is prudent and keeps it simple. 









						But Pensions Get Heavily Taxed in Retirement, Right?...Wrong! - The Pension Store
					

Did You Decide Against Starting A Pension Because of The Income Tax You Pay in Retirement? The Actual Amount You Would Pay Is Way Less Than You Think.




					www.thepensionstore.ie
				




As always not sure if my logic makes sense anywhere but my own head. maybe I am missing something?

50+O


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## marygl (22 Jul 2020)

lledlledlled said:


> I'm not an expert by any means but you may be able to buy back Notional Service for the years you are missing for a full pension.



Many thanks for all this advice.
I have looked into this and have been informed that now that I have gone down to part time work ( to look after children)  I will only have 23 years of service at retirement.
I have been told that I am allowed to purchase 9 years of Notional service.
Could I ask for advice please: am I better doing this or going privately and purchasing AVC's? or should I do both?
many thanks for all advice


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## LDFerguson (22 Jul 2020)

marygl said:


> Many thanks for all this advice.
> I have looked into this and have been informed that now that I have gone down to part time work ( to look after children)  I will only have 23 years of service at retirement.
> I have been told that I am allowed to purchase 9 years of Notional service.
> Could I ask for advice please: am I better doing this or going privately and purchasing AVC's? or should I do both?
> many thanks for all advice



There are several posts on this question here on Askaboutmoney.  Here's one.  It's old so some of the information may be outdated.  Have a search and you'll find others.


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## marygl (22 Jul 2020)

Thank you, its very helpful


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## Early Riser (22 Jul 2020)

marygl said:


> I will only have 23 years of service at retirement.
> I have been told that I am allowed to purchase 9 years of Notional service.



If you do go with Notional Service you will bring your lump sum up to 96/80 (32*3/80) of pensionable remuneration. Revenue allows 120/80. So you should use AVCs to at least fund the addditional 24/80.

AVCs or Notional Service depends on what you are trying to achieve. As Notional Service enhances your guaranteed pensionable income for your lifetime it may be very good value if your genes suggest your are going to be drawing a pension into advanced old age. On the other hand an AVC pot allows the possibility of frontloading pension-pot drawdown in the earlier years of retirement - so either spending it all or passing it on in inheritance if you retirement years are shorter. But it does not give the same level of income guarantee.
Have a read of this :[broken link removed]



marygl said:


> I have gone down to part time work



On this seperate note, make sure you continue to pay weekly PRSI when you go down to part-time. I assume your are Class A (post-1995)?


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## marygl (22 Jul 2020)

Many thanks for this
yes Ive been working in the irish  health service since 2002, and had a few years career break/ minding children and officially went to parttime contract in 2015


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## Early Riser (23 Jul 2020)

marygl said:


> went to parttime contract in 2015


 
Just on this. If you are parttime you may not have much income on which you are paying tax at the higher rate (or,perhaps, any). This may limit the scope for AVCs/Notional Service. If you are going to be paying 20% tax plus USC on any drawdowns (and PRSI on any drawdown before 66), the value on any contributions now is at best very limited unless you are getting relief on those contributions at 40%.

However, even if at 20% relief, it would be worth funding an AVC sufficiently to top up the tax free lump sum to 120/80.


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