# Understanding a Pension



## BourbonWithIce (20 Feb 2020)

I'm a public servant 40 years of age. I have a defined benefit pension and will retired at 65 with full pension.

Is there any benefit to me setting up a private pension? I don't know if a private pension is an AVC or PRSA, don't understand the difference between them. If I did set them up what could I withdraw on retiring vis-a-vie a lump sum etc. Also, do I get tax relief on any private pension.

Apologises if this is covered elsewhere but I find pensions a complete mystery and even when googling them I still struggle to understand them.


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## Protocol (20 Feb 2020)

As you already have an occupational pension, any extra private personal pension you set up would be an AVC.

You can get an AVC or a PRSA-AVC, no need to worry about the differences, I'd say an PRSA-AVC is more flexible?

Yes, you can get tax relief on all pensions conts, subject to age-related limits.

Any AVC would pay out benefits when you retire from the main scheme.

Whether you should do an AVC or not depends on your own situation.


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## Protocol (20 Feb 2020)

By the way, what don't you understand about your DB occupational pension?


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## Conan (20 Feb 2020)

If you expect to get a full occupational pension (say after 40 years service) then you will have little scope for investing AVCs. You cannot fund for an overall benefit package in excess of Revenue limits and your occupatIonal pension benefits (typically a pension of 50% of salary (with an attaching widows/widowers pension) plus a lump sum of 150% of salary represent close to the Revenue max. Certainly if you are going to have 40 years service by age 65, there is no sense in doing AVCs at this stage. You can revisit the issue closer to retirement to determine if there is likely to be any scope for AVCs, say within 5 years of retirement.


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## Early Riser (20 Feb 2020)

Conan said:


> If you expect to get a full occupational pension (say after 40 years service) then you will have little scope for investing AVCs.



I don't think it is as categorical as that.

As the OP is aged 40 he is surely in a Class A PRSI pension scheme. So the maximum Occupational Pension he can get after 40 years is 50% of salary *minus* the State Pension. So even with full service there is still scope for funding. The question remains whether it would be good value in that scenario. The value would depend on whether the OP would be likely to be paying top rate tax on any additional pension he draws down in retirement. We would need to know more about his salary and prospects to comment on this.

Also, AVCs might be worth it if the OP is considering, or is likely to consider, options such as winding down to retirement (such as going part-time in later years) or even taking early retirement. I understand it may not technically be allowed to fund an AVC with the intention of early retirement, but in practice in this scenario there would not be a restriction.


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## Conan (20 Feb 2020)

Early Riser is correct IF  the op is a Class A PRSI contributor. I had assumed (perhaps incorrectly) that he/she was a B/D and a member of the non-integrated scheme. So if the pension at 65 is going to be 50% less the State SW Pension, then there is considerable scope for AVCs. Most public sector unions have AVC Schemes in place, often organised by Cornmarket.


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## BourbonWithIce (20 Feb 2020)

Salary is currently 88k. Yes I am PRSI A employee.


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## BourbonWithIce (20 Feb 2020)

Protocol said:


> By the way, what don't you understand about your DB occupational pension?



I understand DB pension. Half my final salary.i don't understand AVC and PRSA etc


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## Conan (21 Feb 2020)

If your Scheme benefits are less than the Revenue max (which I assume they will be IF you are in an integrated scheme - ie the 50% is inclusive of the State Retirement Pension) then using an AVC structure allows you to personally fund some or all of the shortfall.


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## Early Riser (21 Feb 2020)

The biggest attraction of the AVC/PRSA is that contributions into it attract tax relief at the marginal rate - so 40% for yourself. However, this attraction is lost if you have to pay the same rate of tax again at drawdown. (There may be some other advantages from scheme growth but it is the tax benefit that attracts most).



BourbonWithIce said:


> Salary is currently 88k. Yes I am PRSI A employee.



 So, if you were retiring today at 65 with 40 years service, you would roughly receive an Occ Pension of €31K and you would also be entitled to the State Pension of €13K at whatever age it becomes payable. Lets assume that you would meet the criteria for a Supplementary Pension in the interim. So your total retirment income would be €44K. If you were  to draw down income from an ARF (having transferred your AVC into one) it would be subject to 40% tax. As you have 40 years service you will already have received the maximum tax free lump sum, so no option to top up there.
In this situation I would not be inclined to take out an AVC (there may be some other advantages in terms of estate planning, which I am not familiar with).

However, if you were, at a later stage in your career, considering going part-time, or want to keep early retirement as a possibility, it would be worth thinking about an AVC.  As you would not have full service, you could use the proceeds of an AVC to "top up" your lump sum and pension. If you are a post-2004 pension scheme member, any early retirement would mean an actuarial reduction to your Occ Pension, so it could be particularly advantageous if this scenario.


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## BourbonWithIce (21 Feb 2020)

Thanks for the information above. My wife is a private sector employee but no pension provisions other than the state pension. I now understand the benefits of her looking into an AVC or PRSA whereas it may not be beneficial for me to do so.

Can I ask a really morbid question? If someone pays into an AVC or PRSA say and dies the day before they are due to retire, what happens the money in the AVC/PRSA or if they died 6 months after taking out a lump sum of the AVC/PRSA? If it all gone or what?


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## Conan (21 Feb 2020)

If you die before retirement then the AVC value is paid to your estate.
On retirement you must use the AVC fund either:

 - taking some as an additional lump sum
- using any balance to buy an Annuity (additional Pension), which may cease on death or may continue to be payable for a minimum period- say 5 years
- invest in an ARF and on death your spouse takes over the ARF or if no spouse then any residual value goes to your estate.


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## BourbonWithIce (21 Feb 2020)

Am I correct in saying there's no point to me paying into an AVC or a PRSA as I will retire with 40 years, full pension etc. 

Ex colleagues with over 40 years service have paid 40% of salary into something for a year before retiring and said they saved thousands. What is this?


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## Early Riser (22 Feb 2020)

BourbonWithIce said:


> My wife is a private sector employee but no pension provisions other than the state pension. I now understand the benefits of her looking into an AVC or PRSA whereas it may not be beneficial for me to do so.



It would seem a better idea to look towards a pension for your wife in your circumstances..



BourbonWithIce said:


> Ex colleagues with over 40 years service have paid 40% of salary into something for a year before retiring and said they saved thousands. What is this?



  I had understood that you will have 40 years of service at 65. If you have more service than this it may be possible to get an additional lump sum allowance. The possible extra allowance is 3/80 of pensionable salary for each year of extra service, up to a maximum of 5 years. But the important thing is, it must be service beyond your normal retirement age.

So if you are post-2004 and you normal retirement age is 65, then only service beyond this may be eligible, eg, if you have 42 years service at 67 you might take 2*3/80 of pensionable salary tax free from an AVC. If, on the other hand you are pre-2004 and your normal retirement age is 60 then any service over this age is eligible. So if your normal retirement age is 60 and you retire at 65 with 45 years service you could take 5*3/80*Salary tax free from an AVC. This could be funded by a "last minute AVC" in the final year of retirement.

Here is the relevant reference: https://www.revenue.ie/en/tax-professionals/tdm/pensions/chapter-08.pdf


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## BourbonWithIce (22 Feb 2020)

Thanks!

Can my wife claim relief at 20% or 40%rate. Can she use our combined earnings to qualify at the top rate, or is that relief just single person tax liability?


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## RedOnion (22 Feb 2020)

BourbonWithIce said:


> Can my wife claim relief at 20% or 40%rate


Once she earns over 26,300 (after pension contribution, but can include earned, like rent in your case) it's at top rate - you just switch part of the tax band between you to benefit. I might have missed if you mentioned her salary.

That's assuming you're jointly assessed.


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## BourbonWithIce (23 Feb 2020)

We are jointly assessed.she us on reduced hours only working 2 days a week. So not on the 40% tax rate for her salary.


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## Live Well (25 Feb 2020)

This has been a really informative thread for me so thank you. I am in a similar situation and trying to learn about PRSA \ AVC's as everyone seems to point you towards them after you have a pension.



Early Riser said:


> *The biggest attraction of the AVC/PRSA is that contributions into it attract tax relief at the marginal rate - so 40% for yourself.* However, this attraction is lost if you have to pay the same rate of tax again at drawdown. (There may be some other advantages from scheme growth but it is the tax benefit that attracts most).
> 
> So, if you were retiring today at 65 with 40 years service, you would roughly receive an Occ Pension of €31K and you would also be entitled to the State Pension of €13K at whatever age it becomes payable. Lets assume that you would meet the criteria for a Supplementary Pension in the interim. So your total retirement income would be €44K. If you were  to draw down income from an ARF (having transferred your AVC into one) it would be subject to 40% tax. As you have 40 years service you will already have received the maximum tax free lump sum, so no option to top up there.
> *In this situation I would not be inclined to take out an AVC* (there may be some other advantages in terms of estate planning, which I am not familiar with).
> ...



Please correct me if I am wrong. What I have learnt is that for the OP (Public servant aged 40 so able to get tax relief of 25%) all things being equal (In a Class A PRSI pension scheme, will work for 40 years of service until they are 65 and then get a supplementary pension until 68) there is little value in contributing to an AVC / PRSA now. They are already maximising the age related percentage limit of 25% and any additional income through an ARF will be taxed at 40%.

If the above is true and you wanted to invest\save for the future, at this point are you better looking at doing regular investments (Buying stocks, EFTs, Investment trusts etc). Have you effectively tapped out using Pensions as the best investment vehicle \ wrapper.


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## Early Riser (25 Feb 2020)

Live Well said:


> What I have learnt is that for the OP (Public servant aged 40 so able to get tax relief of 25%) all things being equal (In a Class A PRSI pension scheme, will work for 40 years of service until they are 65 and then get a supplementary pension until 68) there is little value in contributing to an AVC / PRSA now. They are already maximising the age related percentage limit of 25% and any additional income through an ARF will be taxed at 40%.


 
It depends on the individual situation. The OP indicates a pensionable salary of €88K (I assume this is in today's terms). He would have plenty of scope within the 25% age limit to get tax relief at 40% paid into an AVC now. But as his combined Occ. Pension plus Supplementary (or State Pension) would come to about €44K after 65, he would likely be paying 40% tax on any ARF drawdown. The only thing he might benefit from is fund growth. Relatively little as regards tax relief. 40% relief going in but 40% to pay on an ARF drawdown.

However, if his pensionable salary were to be, say, €50K, then his total pension earnings after 65 would be about €25K. If someone in this situation purchased AVCs they would have substantial opportunity to draw down income from an ARF in retirement without hitting the 40% tax band. It depends on the marital situation, also, and whether jointly assessed.


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## Conan (25 Feb 2020)

Early Riser said:


> Relatively little as regards tax relief. 40% relief going in but 40% to pay on an ARF drawdown.


In fact, the tax on the income in retirement could be 40% PAYE + 4% USC. So unlikely to be a very tax-effective strategy.


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## Gordon Gekko (25 Feb 2020)

Conan said:


> In fact, the tax on the income in retirement could be 40% PAYE + 4% USC. So unlikely to be a very tax-effective strategy.



40% relief on the way in, 25 years of tax-free growth, and 44% tax on the way out?

I’ll take that every time, thanks.


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## Live Well (1 Mar 2020)

Thinking back on what you said Gordon Gekko. If the person has already maxed "the age-related percentage limit for tax relief on pension contributions" are they still better off using a pension product as they don't get charged for the growth (No deemed disposal rule?) so they only get taxed with the 44% on the way out after 25 years?


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## Gordon Gekko (1 Mar 2020)

Live Well said:


> Thinking back on what you said Gordon Gekko. If the person has already maxed "the age-related percentage limit for tax relief on pension contributions" are they still better off using a pension product as they don't get charged for the growth (No deemed disposal rule?) so they only get taxed with the 44% on the way out after 25 years?



I can’t see how they would be better off versus investing in their own personal name.


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