# Leaving pension scheme within 2 years. Great tax planning point



## Trent

I am leaving my current job after 16 months, therefore I'm am not entitled to the pension benefits I originally signed up to. In addition to making monthly contributions, I also made c.€7,000 in AVCs during 2006. All of the above contributions saved me tax at 41%/42% and PRSI in the region of 4% (I'm not concerned with 1%/2% either way).

My employer informed me that on leaving, I am now entitled to a refund of all of my own contributions plus AVCs with tax of just 20% to pay on these. This sounds a bit too good to be true as I could just pay the AVCs into another scheme this year and get a further 45% or so of relief, albeit losing out on €7,000 on AVC limit for the year.

Does this sound too good to be true?


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## boaber

*Re: Leaving pension scheme after 16 months (with AVCs)*

It is true, but it would mean you would have to leave employment every 2 years (assuming you are in their scheme from the start).

If you keep doing this, what are you going to live on when it comes to retirement??


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## Trent

*Re: Leaving pension scheme after 16 months (with AVCs)*

Thanks. I don't intend leaving jobs every 2 years, but I got an opportunity that I couldn't refuse a couple of weeks ago.

It's worth noting for anyone who intends leaving a pensionable job within 2 years of joining.


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## Bob_tg

*Re: Leaving pension scheme after 16 months (with AVCs)*

We had a pensions consultant in our company recently who validated that point.  The problem as Boaber points out is that you can't keep doing it or you'll run out of companies to go to!!

Maybe the lesson here is that when you know you are going to leave, max out on your AVCs???


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## LDFerguson

*Re: Leaving pension scheme after 16 months (with AVCs)*

One way of really squeezing maximum benefit from this quirk in the rules is to take the refund of contributions, divide by 0.59 and make a new AVC into your new scheme of the resulting amount. Borrow the difference temporarily if you have to. The tax relief will bring this back to a zero net cost exercice, assuming you're still paying tax at 41%. 

Example - your net refund is €5,600.
€5,600 / 0.59 = €9,492.
Make a once-off contribution of €9,492.
Tax relief on €9,492 @ 41% = €3,892.
Net cost of €9,492 contribution = €5,600.

Liam D. Ferguson
www.ferga.com


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## ClubMan

*Re: Leaving pension scheme after 16 months (with AVCs)*

Presumably one's age related pension tax relief limit must not be breached? 

Also - what about _PRSI_/health levy relief?


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## LDFerguson

*Re: Leaving pension scheme after 16 months (with AVCs)*



> Presumably one's age related pension tax relief limit must not be breached?


 
That's right.



> Also - what about _PRSI_/health levy relief?


 
You can claim this on your contribution in the normal way, thus reducing the net cost.


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## hattrick_12a

*Re: Leaving pension scheme after 16 months (with AVCs)*

So if you leave the company within 2 years you get your contributions back minus tax and you don't get what the company put in?  Can this sum be transferred to a new comanies pension scheme tax free?

But after 2 years you get what the company put in. Can this whole sum be transferred into a new Pension plan, with a new company say? Or can you get the whole sum, your contributions and companies, minus tax?

Is this 2 year cut-off, 2 years after starting the pension plan or 2 years after joining the company?


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## Brendan Burgess

It depends on the pension scheme rules. 

Under the law the maximum vesting period is two years (after joining the pension scheme as distinct from after starting the job?), but some pension schemes have shorter vesting periods. 

If your pension scheme has a vesting period of one year, that means that you will get to keep your employers' contributions if you don't cash the pension scheme. This would usually be the best strategy, unless your AVCs were far higher than the employers' contributions. 

Your vesting period may sometimes be reduced if you had been a member of the pension scheme of your previous employer.

Brendan


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## ClubMan

hattrick_12a said:


> So if you leave the company within 2 years you get your contributions back minus tax and you don't get what the company put in?


Yes.


> Can this sum be transferred to a new comanies pension scheme tax free?


Not *transferred *but you may be able to contribute it in order to achieve the same effect as outlined by _LDF _above.


> But after 2 years you get what the company put in.


Not exactly. After 2 years your rights to the employer contributions vest, you can no longer take any sort of refund but you can transfer the full value (including the value of employer contributions) into a new occupational fund, to a buy out/pension retirement bond or leave it invested in the old scheme. You can *never *take a refund of employer contributions as far as I know.


> Can this whole sum be transferred into a new Pension plan, with a new company say? Or can you get the whole sum, your contributions and companies, minus tax?


As above - you cannot get a refund of the employer contributions before or after 2 years are up.


> Is this 2 year cut-off, 2 years after starting the pension plan or 2 years after joining the company?


2 years after joining the pension scheme unless you have already transferred in vesting time along with contributions from a previous occupational scheme.


Brendan said:


> It depends on the pension scheme rules.



Under the law the maximum vesting period is two years (after joining the pension scheme as distinct from after starting the job?), but some pension schemes have shorter vesting periods. [/quote]
Correct.


> If your pension scheme has a vesting period of one year, that means that you will get to keep your employers' contributions if you don't cash the pension scheme. This would usually be the best strategy, unless your AVCs were far higher than the employers' contributions.


But you still cannot get a refund of employer contributions as far as I know.


> Your vesting period may sometimes be reduced if you had been a member of the pension scheme of your previous employer.


As far as I know it *must *be reduced if you transfer in vesting time along with contributions from a previous occupational scheme.


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## Homer

Brendan said:


> It depends on the pension scheme rules.
> 
> Under the law the maximum vesting period is two years (after joining the pension scheme as distinct from after starting the job?), but some pension schemes have shorter vesting periods.


 
The maximum permitted vesting period is based on scheme service as opposed to company service.



Brendan said:


> If your pension scheme has a vesting period of one year, that means that you will get to keep your employers' contributions if you don't cash the pension scheme. This would usually be the best strategy, unless your AVCs were far higher than the employers' contributions.


 
In general, not taking a refund would be the best option if you are entitled to vested rights because of a vesting period of less than two years. However, it does depend on the ratio of the employer's contributions to your contributions, the rate of tax you're paying and (most importantly) whether you have scope to "gross up" your refund in a new employer's scheme because you are not planning to contribute at or close to the maximum in any event. 

The reason constant "rolling over" of contributions will not work in the long term is because you will eventually run foul of Revenue contribution limits (unless you are prepared to settle for totally inadequate retirement benefits).



Brendan said:


> Your vesting period may sometimes be reduced if you had been a member of the pension scheme of your previous employer. Brendan


 
The vesting period will only be reduced if you transfer in your preserved pension entitlement from your previous employer's pension scheme. Service under a UK scheme does NOT count towards the two year "qualifying service" hurdle.

There are no circumstances in which you can get a refund of the employer's contributions into your hands, other than on retirement, which can only take place after age 50 or if you are retiring due to ill-health. On retirement, part (or in some cases, all) of the accumulated fund can be taken as a tax free lump sum, with the balance used to purchase an annuity and/or (if you have been paying AVCs) invest in an Approved Retirement Fund and/or an Approved Minimum Retirement Fund 

Homer


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## moviestar

Do you get a refund of your contributions only or do you get the benefit of any gains made by the pension fund within the 2 years?

Also is there likely to be any fees etc. deducted?


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## boaber

Depends on the scheme rules really, but usually the refund is the greater of a)the ee contributions paid in (less 20% tax) or b) the surrender value of these contributions (less 20% tax).

There should be no fees for taking a refund of contributions.


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## sonandheir

Was looking into cashing my pension with less than 2 years service due to other job opportunity. Came across this post above;

*Leaving pension scheme within 2 years. Great tax planning point* I am leaving my current job after 16 months, therefore I'm am not entitled to the pension

 My employer informed me that on leaving, I am now entitled to a refund of all of my own contributions plus AVCs with tax of just 20% to pay on these. This sounds a bit too good to be true as I could just pay the AVCs into another scheme this year and get a further 45% or so of relief, albeit losing out on €7,000 on AVC limit for the year.

 Does this sound too good to be true? benefits I originally signed up to. In addition to making monthly contributions, I also made c.€7,000 in AVCs during 2006. All of the above contributions saved me tax at 41%/42% and PRSI in the region of 4% (I'm not concerned with 1%/2% either way).

Does this work? If so I'd be interested doing the same by maxing my AVC's. 
Thanks,

Sonandheir


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## ClubMan

Yes it works. As was already confirmed above.


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## DELLBOY 08

If you are made redundant by your employer before the 2 year vesting period has been completed as opposed to voluntarily leaving, do you still lose your employers contributions?


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## boaber

DELLBOY 08 said:


> If you are made redundant by your employer before the 2 year vesting period has been completed as opposed to voluntarily leaving, do you still lose your employers contributions?



Withdrawal from service is regarded as covering *all *circumstances of leaving service, otherwise than by death, or by retirement in accordance with the rules of the scheme. So, yes, if your scheme rules state that there is a 2 year vesting period, then you will lose the employer portion if you leave, voluntarily or not, within the 2 year period.


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## DELLBOY 08

boaber said:


> Withdrawal from service is regarded as covering *all *circumstances of leaving service, otherwise than by death, or by retirement in accordance with the rules of the scheme. So, yes, if your scheme rules state that there is a 2 year vesting period, then you will lose the employer portion if you leave, voluntarily or not, within the 2 year period.




Thanks for that


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## TaxIsTheft

What if the company u had youre pension with goes banckrupt, is bough over or no longer exists ? Who does the money go to ?


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## LDFerguson

Do you mean the employer or the pension company?


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## TaxIsTheft

Employer


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## LDFerguson

Your pension fund is ring-fenced from the assets of the employer, so even if the employer no longer exists for the reasons you suggest, you would still have an entitlement to your portion of the pension fund.


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