# To pay AVC or not?



## Lamps (13 May 2019)

Looking for advice on whether it is worth my while paying into an AVC.

In the public service since 2007, 36 years of age, so I should retire at 65 with a full pension. I don't have a mortgage and have extra cash every month. Current salary 45k.

I would like the option of retiring early. Is it worth paying into an AVC seeing as I will probably get the full PS pension on retirement? Or will it be of no benefit?


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## Conan (13 May 2019)

Technically, under Revenue rules, you can only use AVC’s to fund any shortfall in pension benefits ie where your expected benefits will be less than the Revenue maximum.
If you are going to have full service at age 65, then it will be unlikely (assuming the current public service DB scheme continues) that your benefits will fall short of the max.
The Revenue max in your case would be:
- A pension of 50% of Salary, plus
- a lump sum of 150% of Salary.

Based on full service that is what you will get under the current PS Scheme. 
Also you cannot fund AVC’s in the expectation of retiring early.
It is possible that a shortfall might exist at retirement, for example:
- if you have earnings that are non-pensionable (overtime, BIK, bonuses etc).
But 30 years away from retirement, you cannot know if such a shortfall will exist. 

So, I don’t currently see you having scope for AVC’s. But closer to retirement that might change.


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## Lamps (13 May 2019)

Thanks for the reply, that clarifies. I was under the impression that if I retired a few years short of my 40 years service, I could use the AVC to top to the value of the 40 years.

Also, I thought if I put money into AVC's I would save the higher rate of tax now and on drawdown I would only pay the lower rate, saving me around 20%. But it appears this is not the case.

Cheers


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## Gordon Gekko (13 May 2019)

I am far from an expert on this stuff, but isn’t the Revenue maximum 2/3 of final salary rather than 50%?


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## Buddyboy (14 May 2019)

Also, wouldn't buying a house be in your more immediate future, and maybe you should be saving for a deposit?  If you put money into AVCs, it is not as easily available.

And the more money you have for a house deposit, the lower a mortgage you will have.

(I'm making an assumption about your desire for house purchase of course).


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## Conan (14 May 2019)

Gordon 
The Revenue limit is a 2/3 Pension out of which you can encash a portion for a lump sum. This is equivalent to a pension of 50% Plus a lump sum of 150% of Salary.


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## Early Riser (14 May 2019)

Conan said:


> Also you cannot fund AVC’s in the expectation of retiring early.



How is this prevented in practice, ie, who enforces it?

Say Mary is 35 years old and is a post 2004 Class A public servant with 10 years pensionable service on a salary circa 46K. So at normal retirement age she could potentially have 40 years service. However, she would like to wind down before that by either going half time from 55 or taking cost-neutral early retirement at 60. Either way she should have only 35 years pensionable service at retirement.

If she proposes to take out an AVC now to fund the shortfall (via tax free top-up, plus ARF) what is the obstacle? Will the AVC company refuse to take her on, or Revenue refuse to give her the tax relief on contributions? Or is there a penalty at exit - say if she retires at 60, tops up the lump sum to max (as she will have more than 20 years service) and uses the ARF to fund the gap to State Pension age?


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## Conan (14 May 2019)

Early Riser
One of the responsibilities of the AVC provider and Trustees of the main scheme is to advise the member  as to the scope for investing AVC’s. Where it is clear that there is no scope for AVC’s (and that may be tricky to work out), then they are obliged to advise the member that AVC’s cannot be invested.
If the only scope is trying to anticipate early retirement (and there is no other benefit gap), then they cannot accept AVC’s.
So investing AVC’s at age 35 I would suggest is not worthwhile. I would wait somewhat closer to retirement to see if there is likely to be any gap in benefits.


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## Early Riser (14 May 2019)

Thanks for that, Conan.

But for a mainstream public service scheme, who are the trustees?  I suspect the pay/pension office will not query an AVC deduction once it has been set up and is within Revenue (tax relief) limits. And, while the AVC provider may advise on the limits for AVCs, I suspect they will sell Mary the Policy once she has explained her future plans.

Am I missing something or are there any other obstacles?

Also, if someone on €46K waited until the commencement of jobsharing to commence an AVC they would lose out on the tax relief advantages.


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## Conan (14 May 2019)

Taking the Public Service example, I am not saying that the designated AVC provider might not “sell” the AVC idea. They might. But I can only outline the rules as they stand. Members need to be careful not just to invest AVC’s because of tax relief. If they “overfund” then at retirement, the main scheme benefits might have to be reduced to bring the overall benefits within Revenue limits. Not what you want to happen.


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## Early Riser (14 May 2019)

Conan said:


> If they “overfund” then at retirement, the main scheme benefits might have to be reduced to bring the overall benefits within Revenue limits. Not what you want to happen.



Point taken on that. But if Mary is confident that she will either take early retirement (cost neutral) or go job-sharing in her later years, the AVCs would be probably be a good investment now ?

Also, what constitutes overfunding in a coordinated public service scheme and what happens with the money in the AVC fund in that case? 

Say Mary invests in the AVCs but then changes her mind about retirement and stays on until 65 (40 years service at €46k).She would have no capacity to increase her tax-free lump sum. Her full occupational pension would be about €10.5K plus her State Pension - but she wouldn't qualify for the latter until 68. Could she not transfer the AVC funds to an ARF to draw down in the meantime? Is there a limit on how much she can transfer to an ARF in this scenario and how is it calculated? 

Is her State contributory pension entitlement taken into account in establishing this limit (even though it is not payable at retirement age)? If the State Pension was not part of the equation she would have considerable scope to fund an ARF.


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## Conan (14 May 2019)

Early Riser said:


> Is her State contributory pension entitlement taken into account in establishing this limit (even though it is not payable at retirement age)? If the State Pension was not part of the equation she would have considerable scope to fund an ARF.



Such a situation provides considerable scope for AVC’s. The Revenue limits allow for a max pension of 2/3rds PLUS the State Pension. So if Mary is in an “integrated scheme” (ie her occupational pension takes into account her State Pension) then she will have plenty of scope for AVC’s.


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## Early Riser (14 May 2019)

Conan said:


> The Revenue limits allow for a max pension of 2/3rds PLUS the State Pension. So if Mary is in an “integrated scheme” (ie her occupational pension takes into account her State Pension) then she will have plenty of scope for AVC’s.



Thanks for clarifying that, Conan.

But on that basis wouldn't all Class A public servants have at least some scope for AVCs, even if they will have full service at retirement ? These are integrated schemes (at least up until 2013 entrants - I'm not sure about the Single Scheme - probably similar) so the maximum annual pension they provide is 50% salary minus the State Pension (plus the lump sum, of course). This is even before considering CNER or going job-sharing.

Going back to the OP - As Lamps joined in 2007 he/she must be Class A and should have scope to tax efficiently fund some AVCs for retirement purposes? It would certainly be valuable if he/she is thinking about retiring early.


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## Gordon Gekko (15 May 2019)

Conan said:


> Gordon
> The Revenue limit is a 2/3 Pension out of which you can encash a portion for a lump sum. This is equivalent to a pension of 50% Plus a lump sum of 150% of Salary.



Hi Conan,

Fair play, you seem to know your stuff.

Take my wife’s circumstances; she is likely to have 40 years’ service at age 61. On that basis she’ll get 150% plus 50% (including the State Pension). The supplementary pension stuff is just noise.

We were planning to start funding AVCs for her. My foolish assumption was that the pot would simply ARF and add to our retirement income. It sounds like I am mistaken?

Many thanks.


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## Conan (15 May 2019)

Gordon,
If her scheme is going to provide a pension of 50% (inclusive of State Pension) then she has scope for AVC’s. The Revenue max in your example is a scheme pension of 50% of Salary ignoring State Pension.
For example, if Salary was €60,000 you suggest that her scheme will give her a pension of :
€30,000 less €13,000 (approx current State Pension)= €17,000
However the Revenue limit max pension from the Scheme would be €30,000. She can receive the State Pension on top.
So if the Scheme is only promising 50% less the State Pension, then she could fund AVC’s to bridge the gap.
However I would point out that if the resulting extra pension income from the AVC fund (whether subsequently invested into an ARF or an Annuity) was going to be taxed at marginal 40% rate plus USC , then the tax advantage of the AVC becomes somewhat negative - 40% tax relief on contributions going in but perhaps a total of 44% tax on the resulting income.


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## allaround (15 May 2019)

excellent points Conan


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## Early Riser (15 May 2019)

Conan said:


> However I would point out that if the resulting extra pension income from the AVC fund (whether subsequently invested into an ARF or an Annuity) was going to be taxed at marginal 40% rate plus USC , then the tax advantage of the AVC becomes somewhat negative - 40% tax relief on contributions going in but perhaps a total of 44% tax on the resulting income.



Good point. Although Class A public servants generally have scope for AVCs I doubt it makes sense in situations where their total income in retirement is likely to push them into the top tax bracket. But for those in the salary range outlined in the OP it is certainly worth considering.


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## Gordon Gekko (15 May 2019)

Thanks Conan.

So look to build a fund capable of delivering €13k via annuity rates?


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## Early Riser (15 May 2019)

Gordon Gekko said:


> Take my wife’s circumstances; she is likely to have 40 years’ service at age 61. On that basis she’ll get 150% plus 50% (including the State Pension). The supplementary pension stuff is just noise.
> 
> We were planning to start funding AVCs for her. My foolish assumption was that the pot would simply ARF and add to our retirement income. It sounds like I am mistaken?





Gordon Gekko said:


> So look to build a fund capable of delivering €13k via annuity rates?



I am not sure if your wife’s scenario is the same as one you previously mentioned in another thread, ie, pre – 2004 Class A public servant (normal retirement age of 60) with 20 years served and 20 to go, salary circa €80k and hoping to retire in her early sixties? If so, I am not sure about AVCs.

Her Occupational Pension would be about €27K and then the State Pension of €13k at 68 (presumably).

Once she hits state pension age she would move into the top tax bracket. Any additional income from an ARF or Annuity will be at the top tax rate.

If she works between retirement (61) and State Pension age her income is likely to bring her into the top tax rate then also. If she doesn’t work in this interval she would be entitled to claim the Supplementary Pension, which in this case should equate to the State Pension, again bringing her into the top tax bracket.

Of course, you may consider that some of these benefits/payments will be reduced/ disappear in the years ahead, such as the State Pension or the Supplementary pension. Otherwise I’m not sure if the AVC route is worthwhile, if she has to pay top rate tax (plus USC) when drawing down from either the annuity or ARF.


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## Gordon Gekko (15 May 2019)

Yes, same scenario. I’m not too bothered about the higher rate tax piece. The main attraction of a pension fund for me is getting €100 invested in equities for a very long time and on a tax-free basis.

Yes, 4% will become payable from the fund at age 61 leading to a tax leakage of 2%, but no big deal. The €300k odd that we’d hope to build will remain invested in equities with a view to 70% of it going to the kids, plus we get 2% net income from it to cover the Hendricks bill.


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## allaround (15 May 2019)

interesting reading above, so say post 1/4/04 entrant if they commenced avc probably scope to look at cost neutral retirement even at 60 (if avc allows) and maximise pension/lump?


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## Early Riser (15 May 2019)

allaround said:


> interesting reading above, so say post 1/4/04 entrant if they commenced avc probably scope to look at cost neutral retirement even at 60 (if avc allows) and maximise pension/lump?



Yes, there are possibilities in it. The lump sum can be maximised (not to the full 150% of salary, a small reduction because of retirement before normal retirement age for the scheme) and an ARF fund could help bridge the gap to 65 (Supplementary) and/or State Pension age.


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