# Key Post: Could AVCs be a waste in a Generous Defined Benefit



## es regnet (15 Sep 2004)

Hi,

I'm a member of a defined benefit pension scheme with my employer, and when I retire in thirty odd years, I will receive an annual pension of 37/40ths of my final salary. (I starting working for the employer too late to get the full 40 years of service before I'm forced to retire at 65).

I would like to save some extra money, and making additional voluntary contributions seems one reasonably tax-efficient way to do it.

However, I have done some reading about pensions, and it seems that one is only allowed to have a pension of at most 40/60th of ones final salary. So if I were to make AVCs, it appears that I might never be able to claim some of the extra money as a pension. 

So my question is this: if when you comes to retire, you have extra money in your pension beyond that needed to get an annual pension of 40/60ths of your final salary, what happens to the extra money? Do you lose it? Can it be used for something else? If so, what? And should people really be paying as much as they can afford into their pension? Or is it a bad idea to overshoot?

Thanks,

Es regnet.


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## ajapale (15 Sep 2004)

*Re: Defined benefit + AVCs?*

Hi er



> 37/40ths of final salary



I think this should be 37/80ths, if not it is one tremendous pension scheme!



> what happens to the extra money?


In a defined benefit pension scheme the employer promises to allow you retire on a proportion of your retiring salary. The employer takes all the risk. So if the fund does better than expected the employer can take this. If the fund does worse than expected the employer has to make up the difference.

ajapale


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## es regnet (15 Sep 2004)

*Re: Defined benefit + AVCs?*

Hi Ajapale,

Thanks for the reply. Your are correct. It should be 37/60ths, not 37/40ths, I believe.

> In a defined benefit pension scheme the employer promises to
> allow you retire on a proportion of your retiring salary. The
> employer takes all the risk. So if the fund does better than
> expected the employer can take this. If the fund does worse
> than expected the employer has to make up the difference.

So is there no point at all in making AVC's at all? Is it simply volutarily giving free money to my employer?

Thanks,

ER.


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## ajapale (15 Sep 2004)

*Re: Defined benefit + AVCs?*

Hi er,

What type of AVC's are availiable to you?

Is it a "Buy Service" type? or a defined contribution AVC?

If its the former I imagine you can buy 3 years service to allow you retire on 40/60ths of your retiring salary. If, when you retire, you have worked 40 years then you are correct you loose your AVC bought service.

Does your company have a *Pension Scheme Booklet*? You should try to get a hold of it. Do you get an *annual statement* of your projected pension entitlements?

Also does your company have a *Pensions Department* or *HR departiment*? If it does you should contatct them and ask them your questions. 

Some companies that operate DB schemes do not have a pensions department or a helpful HR department that you feel you can talk to. I have found that *trade unions* can be helpful even if you are not a member.

Finallly, and this goes without saying, but you should always seek independent professional advice concerning your pension arrangements from IFSRA regulated Authorised Advisors.

Having said that, to date I have not found any AA who has more than a passing understanding of DB occupational pension shcemes.

ajapale


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## Charly (15 Sep 2004)

*Defined benefit +AVC*

This is a very good question 
If you max out on pension plus AVC rather than loose to employer can you use surplus to retire earlier

your views would be appreciated

Thanks


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## es regnet (15 Sep 2004)

*Re: Defined benefit + AVCs?*

Hi Ajapale,

Thanks for the information. It gives me a good idea of what I need to look for.

> Is it a "Buy Service" type? or a defined contribution AVC?

It's a defined contribution AVC. As far as I have been able to find out, it's not posisble to buy extra defined benefit years. It appears that the these AVCs can be used for several different things, but it's not clear what happens if you are already running close to the government limit on a maximum pension.

From what I've read, the government doesn't seem to allow you to have a pension of more than 40/60ths of final salary, so it's not at all clear whether anything could be gained from making these defined contribution AVCs, except to gather a big enough pot to cover the 3/40ths shortfall that I will have. Does anyone know what happens to money beyond that?

I have already got a copy of the pensions booklet, which doesn't cover this issue. I haven't been able to get answers from the personnel department. It's an excellent idea to contact the union. I'll try that next.

> Finallly, and this goes without saying, but you should always
> seek independent professional advice concerning your
> pension arrangements from IFSRA regulated Authorised
> Advisors.

Yes, I should also try this. My experience with such things, though, is that it is very difficult to get satisfactory answers from such people, beyond those that are easily found in any personal finance book or revenue guide.

Thanks again for your help.

ER


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## Conan (16 Sep 2004)

*AVC*

If your main scheme provides 37/60ths of Final Salary, the scope for AVCs may be limited, since the maximum pension you get get (main scheme + AVC fund) is 40/60ths or 2/3rds.
However scope may well exist for reasonable AVC funding under the following headings:
1. To fund the shortfall of 3/60ths
2. On what salary is the 37/60ths calculated? If its basic salary then scope may exist to base benefits of total taxable earnings (incl. bonuses, BIK etc). Under Revenue rules you can get a pension of 2/3rds gross taxable earnings (though many schemes base benefits on basic salary).
3. Does you main scheme provide a spouses pension on your death in retirement? If not then AVCs could fund to bridge this gap.
4. Does your main scheme provide indexation of pensions in retirement? If not then AVCs could be used to help bridge that gap.
5. Finally your main scheme may take Social Welfare pension into account, i.e. your 37/60ths is based on an basic salary less an allowance for State pensions (often expressed as basic salary less an amount equal to 150% of the State Retirement Pension). Revenue rules allow for the State pension to be paid to be paid in addition to the main scheme.
In my experience most people in Defined Benefit schemes have plent of scope for AVC to bridge some of the above gaps (unless your are a member of a "Rolls Royce" arrangement - such as the Civil Service pension plan).
You should talk to your Scheme Trustees or Plan advisor to get specific advice. One of the responsibilities of Trustees in this regard is to ensure that you do not overcontribute AVCs.


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## rheinie (16 Sep 2004)

*AVC's*

I have 38 years service in a company defined benefit scheme ,40/60ths is full benefit I am also paying AVC's is this a waste of money going on the above comments.thanks


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## Billo (21 Sep 2004)

*AVC's*

rheinie,
IMHO it is still worth your while to pay AVC's. When you retire,you can commute up to 25% of your pension fund(i.e. take a lump sum). This would normally reduce your pension, but you can use your AVC money to go toward the lump sum and this will lessen the reduction in pension. I find the whole area of pensions very confusing myself.
Rgds
Billo


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## alan.caulwel (1 May 2008)

i am of the opinion that you will find it impossible to overfund your persion with Defined Contribution A V Cs i work in this area and it is unheard of to overfund. however i am quite sure that any overfunding after purchasing your pension will be returned to you less the marginal rate of tax at the time of drawdown


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## Don_08 (5 May 2008)

I would get a quote from your HR/Pension provider - they can calculate if you are overfunding on your AVCs.

The max pension you can get from a scheme is 2/3rds of final taxable earning - with pension increases of CPI or 3% ( whichever greater) , and spouse's portion of 100%.  If your scheme pension plus the AVC converted to give those additional benefits is greater than this, then your scheme pension will be reduced. So effectively you will lose the AVCs.


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## roland (8 Jun 2008)

Don_08 said:


> I would get a quote from your HR/Pension provider - they can calculate if you are overfunding on your AVCs.
> 
> The max pension you can get from a scheme is 2/3rds of final taxable earning - with pension increases of CPI or 3% ( whichever greater) , and spouse's portion of 100%. If your scheme pension plus the AVC converted to give those additional benefits is greater than this, then your scheme pension will be reduced. So effectively you will lose the AVCs.


 
I thought the main benefit of AVCs is to fund for a better pension on early retirement.  For example if you are getting 40/60ths at your normal retirement age, then if you retire 5 years earlier the revenue will allow you a max pension of 35/60ths.  However a pension scheme that pays you 40/60ths at normal retirement age will not pay you 35/60ths if you retire 5 years early - they will reduce it by more than that to allow for the fact that they are having to start paying your pension 5 years earlier than they had planned.  So, AVCs will allow you to bring it back up to 35/60ths.  I hope I've got this right!  Any comments by those in the know would be appreciated.


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## Don_08 (8 Jun 2008)

roland said:


> I thought the main benefit of AVCs is to fund for a better pension on early retirement. For example if you are getting 40/60ths at your normal retirement age, then if you retire 5 years earlier the revenue will allow you a max pension of 35/60ths. However a pension scheme that pays you 40/60ths at normal retirement age will not pay you 35/60ths if you retire 5 years early - they will reduce it by more than that to allow for the fact that they are having to start paying your pension 5 years earlier than they had planned. So, AVCs will allow you to bring it back up to 35/60ths. I hope I've got this right! Any comments by those in the know would be appreciated.


 

This is the main advantage - but the Revenue do not see it this way - and you are not allowed to "fund" for early retirement.  Its an odd situation alright.  If they did checks and it appeared that you were paying in more than required for funding for max benefits at Normal Retirement Age then they might have something to say.  Of course saying that, have never seen anyone done for this - checks would be few and far between.  And it could be hard to prove someone was "funding" for early retirement.  

The assumptions used to calculate the contributions for Rev Max are quite strong - so there is a good chance investments would outperform the assumptions anyway - so if you found yourself with a bigger fund than expected a few years before retirement then there is nothing to stop you retiring at that stage.


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## Eggball (11 Jun 2008)

Sorry, can I just get this straight?  Is it the situation that if you pay a ganseyload of money into an AVC, then, when you retire, if the AVC will give you an income of more than 2/3 of final salary, the excess goes to the employer?  

And if that is the case (correct me if I have misunderstood) then the sensible thing to do would be to retire as soon as you hit the point where your AVC will give you that magical 2/3 income, even if that means retiring early.  Have I got that right?


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## Don_08 (11 Jun 2008)

Eggball - if you did manage to fund excess AVCs, which is very hard to do then yes.  However its not 2/3rd of final taxable earnings if you retire early - its mostly ( depends on ind situation)   

Time Served in company / Time should have worked to NRD  x 2/3 x Final earnings.

The best thing and we all advice employees with large AVCs pots - is to get a check done every five years and shorter intervals coming up to retirement.

Of course - you will need employers permission to retire early - so that might not be possible either.


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