# AVCs, Maximum Limits - What to do please?



## molloyda (27 Nov 2007)

I'm working since 25 (32 now) and paying a pension since then, aiming at retiring at 65.  The pension is a defined benefit pension when I retire of 0.5 times salary + lump sum of 1.5 times salary (index linked afaik).  All is well there - pretty standard across where I work.

I'm currently earning 87k and my pension contribution per month is 407 euro, which works out to be 5.5 - 6% which seems pretty reasonable.

Three years back I started into an AVC with the intention of  possibly retiring 5 years earlier and currently I pay about 230 euro per month (of 7240 gross) into it (3% ish).  

Indeed, things were going fine and I was thinking I was financially sensible.  Now Cornmarket took over the previous company and an advisor came to visit me and told me that I should MAXIMISE my AVC up to the very maximum of 20% (after the other pension stuff is taken away) for my age.  

So now he's come up with gross contributions per month of 1041  (551 after tax taken into account) for my AVC...  an increase of 4-5 fold!

This would provide benefits at 65 of 1.4 million, with a projected pay of 225k.  

This seems massively over the top to me and I was wondering if anyone might have any advice!  I mean the AVC contributions would be 2.5 times my pension contributions each month!

Surely, this would push me right over the limits of 2/3rds final salary - given that I should already pretty much be at this point with my current pension. 
Equally, in today's tax terms 0.5 salary would already have me teetering on the married tax limit.  So even if I was allowed to top up my salary from my AVC money, I'd just end up paying the higher rate of tax anyway (in todays terms).  When I mentioned these concerns the advisor touted ARFs as some magical vehicle where I'd only be paying 3% tax pa - which was misleading imho.

Is this sort of recommendation more in Cornmarket's interest or do they have valid financial reasons for pushing this on me?

Thanks for any advance in advance,
Dave


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## Protocol (27 Nov 2007)

Take your time.

Don't agree to anything.

Do your homework.

Personally, at age 32, paying 20% of salary into a pension seems huge.  Can you afford it?  What about your mortgage?

What if you have a family now, or in the future?  Surely you'll need your income for that?

Or a new house, extension, etc.??


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## ClubMan (27 Nov 2007)

molloyda said:


> Now Cornmarket took over the previous company and an advisor came to visit me and told me ...


And get *independent *advice!


> This would provide benefits at 65 of 1.4 million, with a projected pay of 225k.


You do realise that this is just a speculative projection based on assumed growth/inflation/indexation rates that may bear no relation to what will actually happen?


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## molloyda (27 Nov 2007)

Thanks for the responses

Yes technically I can afford it since I was fortunate enough to get into my house before things went too nuts.  But on this matter, I do have some concerns about tying up such a huge amount of my money into long range pension funds, when you never know what is around the next corner in the mean time.  Thinking carefully, my gut tells me that it's too much to invest (probably why I posted here!)

As for the independent advice - you're bang on the money here.  This is what has alarm bells ringing for me.  I am planning on talking to a few people who are a little in the know on these topics also.

I'm aware about the speculation element - my current AVC (like most other funds) has actually dropped in value in the past number of months.  They based figures around 3% rise in salary coupled with 6% p/a growth in the fund... but yes, I'm cautious of this also.

However, is anyone aware of maximums and tax implications.

Let's say for arguments sake you had a million euro in an AVC at the age of 60.  And let's say that 100k was the higher tax rate cutoff for a married couple, but also 50% of your salary at retirement.  So you could pay yourself 500,000 for those five years, keeping at a low tax rate.   You'd get your lump sum and your 50% of salary for the other years based on your pension.

But what about the other 500k you have in your AVC - are you  breaking pension benefit limits of 40/60ths  (or .5 salary + 1.5 salary lumpsum)?

Or would you just get hit for a straight higher rate tax cut right off the top at this stage?

I had seen some indication of potential for pension providers to "return your premiums" where you overfunded a pension - this doesn't sound very financially pleasant.

Apologies for all the questions,
Dave


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## Conan (27 Nov 2007)

Dave,
Your benefit structure as outlined sounds like a Public Service/Civil Service employment. Under Revenue rules there is an overall limit as to the benefits which can be provided. Since you potentially will have 40 years service, you will get the max scheme benefits. 
The gap between what you are entitled to and the Revenue maximum in your case is not that large:

Your 50% pension could be circa 55%
The Spouses Pension could be 100% of your pension
The only other gap would be if your main scheme benefits are reduced by the State Social Welfare Pension. Is there such an offset?

For Cormarket simply to say that you can contribute the maximum of 20% is negligent. Do you have the capacity (in benefit terms) to do so? Additionally to lock in that level of contribution for some 30 years is questionable.

Finally, under Revenue rules you cannoy contribute AVCs on the basis that you intend to retire early. The figures (benefits and contributions) have to be calculated on the basis that you will retire at normal retirement age.

Sounds to me that Cornmarket are in "sales" mode and not "advice" mode.


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## asdfg (27 Nov 2007)

There are plenty of ways to increase your benefits without breaking revenue rules 

1. Is your pension reduced by the state pension. Most DB schemes are. Revenue allow you to make up this deduction by way of AVC
example
Company Pension..................... 30,000
Less State Pension....................10,000
Payable from Compant Pension ....20,000

Payable from AVC......................10,000

2. Spouses Pension. How much does your pension provide for. You can provide up to 2/3 of your pension.

3. Early retirement. Although calc are based on you retiring at 65 you can under revenue rules retire at 50. In this case you will normally get 1/80 for each year worked up to a max of 40 years plus a reduced lump sum payment of 3/80 for each year worked. AFAIA you can make up this shortfall in pension (2/3 of final salary) by way of AVC.

I'm sure there are more ways of assessing your AVC but these are the main ones. 

It is a long time to your retirement. Laws can change as to when you can assess pensions etc very quickly.


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## molloyda (27 Nov 2007)

Conan said:


> Dave,
> Your benefit structure as outlined sounds like a Public Service/Civil Service employment.


Yes this is correct.



			
				Conan said:
			
		

> The only other gap would be if your main scheme benefits are reduced by the State Social Welfare Pension. Is there such an offset?


To my knowledge, the social welfare pension will be provided by default from the age of 65 (under my pension scheme).  But if I retired early, I would need to cover this aspect myself if I wished to assign myself a similarly "pension-like" salary from 60-65.



			
				Conan said:
			
		

> For Cormarket simply to say that you can contribute the maximum of 20% is negligent. Do you have the capacity (in benefit terms) to do so? Additionally to lock in that level of contribution for some 30 years is questionable.


To be fair to Cornmarket - they seemed to be taking other factors into account.  But the recommended amount was about 14%.  The advisor did ring earlier today to indicate that he had forgotten one of the other benefits, so a smaller amount (by about 1.5%) would be more appropriate.  I agree with the questionability of the lock-in level of contribution .. I would have assumed that I could have changed contribution level at a later stage.



			
				Conan said:
			
		

> Finally, under Revenue rules you cannoy contribute AVCs on the basis that you intend to retire early. The figures (benefits and contributions) have to be calculated on the basis that you will retire at normal retirement age.


Yes the quotes given were for my age at 65.

Many thanks,
Dave


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## molloyda (27 Nov 2007)

asdfg said:


> There are plenty of ways to increase your benefits without breaking revenue rules
> <snip>
> 2. Spouses Pension. How much does your pension provide for. You can provide up to 2/3 of your pension.



This is one part I was quite unclear on.  My wife hasn't been in very stable jobs and she's currently minding our kids in a full-time role so she's been lacking from a pension aspect.  

However, let's say I have a personal (I use this loosely) pension of 50k (in today's terms).  Even with married tax bands we would still be paying the higher rate of tax on some of the money.  If I was contributing more money now into a spouse's pension and we had joint pensions of 75k - we'd pretty much end up paying the higher rate on the remaining 25k anyway.  

So I could load a pile of money into an AVC now avoiding the tax, but simply get hit for it full whack at 65 onwards?  Is there any point in this?

Sorry for all the questions
Dave


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## MMilken (28 Nov 2007)

A spouse's pension is a pension that 'kicks-in' in the event that you predecease your wife when you have retired.

In other words, in the event of your death then the pension of 50K (as in your example) would continue to be paid to your spouse for the rest of her life...that is called a 100% Spouse Pension.

Your employment probably does not offer such a high level of spouse's pension...50% would be typical so a pension of 25K (in your example) would become payable to your spouse in the event of your death in retirement.

You can fund this shortfall (100% is the Revenue Maximum) through AVCs.


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## molloyda (28 Nov 2007)

MMilken said:


> A spouse's pension is a pension that 'kicks-in' in the event that you predecease your wife when you have retired.
> 
> In other words, in the event of your death then the pension of 50K (as in your example) would continue to be paid to your spouse for the rest of her life...that is called a 100% Spouse Pension.
> 
> ...



Ok that clears up a lot for me - many thanks,
Dave


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## upport (30 Nov 2007)

Hi Dave,
If your employer entertains requests for early retirement then an AVC is a very attractive option due to 41% income tax relief and 6% prsi relief at source.Check the charges..if only c.50% is invested in year one then run a mile.Its little consolation to be able to reduce future contributions if existing ones are front loaded.A PRSA can be set up as an AVC and has controlled charges e.g 5% of each premium and 1% annual management charge.PRSA can be reduced or increased or suspended in future years.
Growth is tax free,study the funds available to you and select what suits you.I wouldnt worry to much about paying income tax in retirement,the tax exempt threashold at the moment is c.€39000 pa for married couple age 65+,likely to be indexed linked going forward.
You dont have to contribute the max,pick a net amount that suits you and then gross it up,thats the figure that suits you.You can always increase your contribution again (within limits).


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## molloyda (3 Dec 2007)

Thanks for this.  The AVC scheme is set up with the similar to the scheme you are talking about.  It actually works out to be a 5.95% initial charge and then a 0.75% fund charge.

I was very sceptical about this, so I did up a spreadsheet comparing it to some of the "low charge PRSAs" such as those by LABrokers who offer 0% initial charge followed by a 1% annual fund charge.

Guess what!?  Over 30 years they work out to be almost identical in overall charges.  It can vary a little depending on growth rates etc. but overall there's not much in it.  As for those PRSAs with 5% upfront and 1% fund - they are the worst of all over a long period of time.

I was quite amazed in fact.

Dave


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