# Maximise AVC's out of savings ?



## Daddy (27 Jan 2014)

In 5 years time approx hope to retire at age 60 and that my wife can do so in the same year at 57.

We have savings and we are not maximising our AVC's fully.   Would it be a good idea to maximise the AVC's by falling back on our savings to fund the shortfall we would have on our monthly take home pay.   We would have to contribute in total approx 10k to the pensions to be maxed out at a cost of approx 50% of that after tax relief.  We are moving towards life styling/medium/low risk investments for our pensions.    Just my thinking says it would make sense as in 5 years time hopefully the pot will be at least 50k higher and it will have only cost us 25k to make it such.   Especially as interest rates are so low on savings now and likely in the medium term.    Thoughts appreciated.


----------



## Steven Barrett (27 Jan 2014)

It makes perfect sense if your pension pot is of a decent size. 

If you have a relatively small fund, you either get an annuity that isn't worth much or you have to stick most/ all of the fund into an AMRF until you are 75. 

You also have to remember there are management fees in the pension, so you need to clear those charges as well. 

Steven
www.bluewaterfp.ie


----------



## Conan (27 Jan 2014)

Daddy,
It is not quite that simple.
If you invest €50k gross between you, then you will get tax relief (at 41%) on the way in. However when you come to draw down the fund (whether as an annuity or from an ARF) you will pay tax on the drawdown (the total tax rate depending on your total combined income). 
Where the AVC will make sense is if you can use the AVC Fund to augment your retirement lump sum (either up to 150% of Salary or 25% of your total fund). So getting tax relief on the way in but getting some or all of the AVC fund back tax free (or taxed at 20% if the total lump sum exceeds €200,000) makes perfect sense.

Equally, if you pay tax at marginal rate now but expect to pay tax at the basic rate (20%) post retirement, then it also makes sense. 

Without knowing all the figures (your expected funds/pensions on reaching age 60) it is hard to be precise.


----------



## Daddy (27 Jan 2014)

Thanks.
At age 60 and 57 our pots will each be 200k approx as things stand.
Our schemes will allow each of us to withdraw cash of 55k and 75k respectively which we already have in the pots
So we will each have 145k and 125k for Amrf / arf  or annuity purchase.

I would very much think we would under current rules be paying 20% on any income.

So Conan what do you think about the Original suggestion based on this.  Thanks.


----------



## Conan (27 Jan 2014)

Based on your retirement lump sum numbers, they will be tax free. So an additional contribution of €25k gross each will give you each an additional €6k approx tax free on retirement. Whether you use the residual funds to buy an annuity or an ARF, if you tax rate after 60 will be the basic rate (20%) then an AVC now with marginal relief does make sense.


----------



## Daddy (27 Jan 2014)

Thanks again but not sure where you get the additional 6 k each tax free from on this.


----------



## Conan (28 Jan 2014)

If you are in a DC scheme, then on retirement you can take up to 25% of the accumulated fund tax-free (max €200k) on retirement. So if you invest an additional €25k then the tax free lump sum should be circa €6k higher.
Also worth bearing in mind that you may have the option of taking a tax-free lump sum of up to 150% of Final Salary (but if you go this route then you must buy an Annuity with the balance of your Fund).
If you can outline your Salary, years of service by retirement and estimated Fund at retirement then I could outline options more clearly.


----------



## Steven Barrett (29 Jan 2014)

Conan said:


> Daddy,
> It is not quite that simple.
> *If you invest €50k gross between you, then you will get tax relief (at 41%) on the way in. However when you come to draw down the fund (whether as an annuity or from an ARF) you will pay tax on the drawdown (the total tax rate depending on your total combined income).*
> Where the AVC will make sense is if you can use the AVC Fund to augment your retirement lump sum (either up to 150% of Salary or 25% of your total fund). So getting tax relief on the way in but getting some or all of the AVC fund back tax free (or taxed at 20% if the total lump sum exceeds €200,000) makes perfect sense.
> ...



You still get 25% of it out tax free, so even if he was paying at the higher rate (which Daddy subsequently says he won't be), you still do better off from a tax point of view. 



Steven
www.bluewaterfp.ie


----------



## bcol1 (28 Jan 2015)

I have what i think is a similar query, so i thought i'd add it here rather than starting a new thread.

I am also wondering if i should be maximising my AVCs instead of just putting money on deposit, or setting up an alternative investment fund.

I have a DC pension from my employer (Employer pays 8%, Employee min 2%, and i currently pay AVCs of 10%), and employer pays all the fund charges. I am 39 yrs old, i have 17 yrs service in the pension, and pension value currently €195k. Within the DC pension, i would have the option to retire at age 50, and take a tax free lump sum, hopefully i will be in a position to avail of this option. With this in mind, would it be wise to maximise my AVCs into my pension for the next 10 years as a way to grow my money tax free?
Thanks for any advice.


----------

