# Surplus AVC



## garryb (12 Jan 2019)

When you retire, and taking the maximum amount allowable tax free out of an AVC, the remainder can be put into an ARF. Is it possible instead to take the remaining amount out instead of putting it in an ARF and pay tax on that amount. Would you also have to pay USC and PRSI on this amount?


----------



## Conan (12 Jan 2019)

The AVC fund must be linked to the main scheme. So AVC benefits must be taken in conjunction with the benefits under the main scheme.
Assuming the AVC pot is used initially to top up the retirement lump sum from the main scheme to the Revenue maximum, any excess can be either:
- used to buy an additional annuity
- invested into an ARF, OR
- taken as income in the year ( which will be subject to Income Tax, USC and possibly PRSI if under age  66).


----------



## garryb (12 Jan 2019)

Thanks Conan. I have it linked to main scheme.


----------



## Pieface (13 Jan 2019)

I am trying to work out different scenarios to find out how much is too much AVCs. Even with the tax relief received for contributions, I am guessing that it is not always wise to contribute to the max because if there is a huge surplus after the tax free lump sum, then further amount taken as lump sums will be taxed, or if AVCs are transferred to an ARF there will be notional 4% that is taxed every year. Without working out different scenarios, is there a general guideline that we can use in terms of how much is too much AVCs vs say contributing the surplus to a unit linked fund and getting taxed at 41%? How does it differ for a retired person is taxed at 20% vs 40% income tax? Thanks.


----------



## Conan (13 Jan 2019)

The most tax effective AVC investment is where you can use the full AVC fund to augment the scheme retirement lump sum (in a DB scheme) up to the Revenue maximum. So for example if you have only 30 years service, the scheme lump sum might be 30x3/80ths of Final Salary, but the Revenue limit is 150% of Final Salary (so long as you have a minimum of 20 years service). So building up an AVC pot of  an additional 30/80ths is very tax effective, in that you get tax relief on the contribution but pay no tax on drawdown of the AVC pot.
As you correctly point out if there is an excess beyond the above, then potentially there the tax benefit is reduced or non-existent. If you get 40% tax relief on the contributions but expect to pay 40% Income Tax (plus USC) on the resulting additional pension income (either drawdown from an ARF or from an additional Annuity) then there is no tax benefit. Arguably not worth funding in excess of maximizing the tax-free lump sum.
 However if your marginal tax rate in retirement is going to be 20% or zero, then it can be a sensible strategy.


----------



## Gordon Gekko (13 Jan 2019)

Apologies for the simple example...

If someone is on €80k a year and has 20 years’ service, ordinarily the lump sum will be €60k.

If he/she puts €60k into an AVC fund, is it then possible to get that tax-free as part of a €120k lump sum?

And when is it paid, at retirement or at NRA? The latter presumably, unless the person takes early retirement (and suffers some form of actuarial reduction)?


----------



## moneymakeover (13 Jan 2019)

@Pieface
https://www.pensionsauthority.ie/en/LifeCycle/Tax/Tax_on_lump_sums_at_retirement/


According to advic between 200k and 500k lump sum taxed at 20%


So that's worth putting in the avcs


----------



## Conan (13 Jan 2019)

Firstly, the Revenue maximum retirement lump sum is 150% of Final Salary, subject to having completed at least 20 years service at retirement.
If the above calculation exceeds €200k, the first €200k is tax free, with any excess taxed at 20% (up to an excess of €300  - so a total of €500k).

Gordon - your calculations are correct. That’s where AVCs make sense.
The lump sum ( including any additional lump sum from an AVC pot) is payable on retirement.

Moneymakeover- the absolute limit (assuming we are talking about a DB scheme) is 150% of Final Salary. You cannot fund for a retirement lump sum in excess of this figure irrespective of how it is taxed.


----------



## Gordon Gekko (13 Jan 2019)

Thanks Conan. I’m confused; on retirement or at Normal Retirement Age?

e.g. does a departing 50 year old on €80k a year and with €60k worth of AVCs get his/her €120k immediately, or does he/she have to wait 10 years until NRA?

I thought all that Cost Neutral Retirement stuff would kick in.


----------



## moneymakeover (13 Jan 2019)

In my case, defined contribution,

So first 200k tax free
Subsequent 300k @ 20%

If I exceed 800k (!) there are still tax benefits

But to max the tax benefits I should target 800k


----------



## Pieface (13 Jan 2019)

Gordon Gekko said:


> Apologies for the simple example...
> 
> If someone is on €80k a year and has 20 years’ service, ordinarily the lump sum will be €60k.
> 
> ...



Can I get some clarification please. In this example, is €60k tax free and another €60k at 20% tax?


----------



## Pieface (13 Jan 2019)

I think I got that wrong. Salary at €80k with 20 years service means tax free lump sum is €120k. And if DB scheme only gives out €60k then another €60k can be  taken from AVC also tax free.


----------



## Pieface (13 Jan 2019)

This thing about 20 years service allowing 150% of final salary perplexes me. What if in your final job before retirement you only have 1 year of service but in your whole life you have worked more than 20 years? How do you calculate the tax free lump sum then?


----------



## Early Riser (13 Jan 2019)

Gordon Gekko said:


> Thanks Conan. I’m confused; on retirement or at Normal Retirement Age?
> 
> *e.g. does a departing 50 year old on €80k a year and with €60k worth of AVCs get his/her €120k immediately, or does he/she have to wait 10 years until NRA?*
> 
> I thought all that Cost Neutral Retirement stuff would kick in.



In the Public Service, at least, the departing 50 year old would not get €120K if taking cost neutral early retirement. Even if he/she had more than €60k in the AVC fund to "compensate" for the actuarially reduced PS lump sum, it still would not work. The 150% of final salary tax free is reduced as well if taking cost neutral early retirement. I don't recall off hand what the reduced percentage (per year) is. I assume that if the retiring 50 year old opted for a preserved pension they would get the €120k at 60 - although charges may somewhat deplete the AVC fund in the meantime.

A pre 2004 PS can (not must) retire from 60 without actuarial reduction. Your example could only apply in the PS to a pre 2004 entrant. For post - 2004, cost neutral retirement is only available from 55 with NRA at 65. There are exceptions (eg Gardai).

I assume similar would apply to a DB scheme in the private sector - if the scheme  allowed cost neutral early retirement.


----------



## Conan (13 Jan 2019)

So many questions.
Gordon- the 150% max after a minimum of 20 years applies on normal retirement age. If one is retiring early, then the calculation is a little more complicated and will be reduced somewhat.

Moneymakeover- in a DC scheme the individual can take a retirement lump sum of either 25% of the Fund of up to 150% of Final Salary (assuming at least 20 years service) BUT in such a case the residual fund must be used to buy an Annuity (not invested into an ARF). If you go the 25% route (so €200k) and have a fund in excess of €800k, any additional lump sum is taxed at 20%. But that may still be good if the alternative is additional pension income taxed at 40% plus USC. But it is arguable if it is worthwhile the member contributing further contributions prior to retirement to exceed the €800k as any excess will generate an additional 25% lump sum taxable at 20% plus pension income on the excess 75% taxable at 40% plus USC.

Pieface- if the salary is €80k with only 20 years service and the scheme lump sum (typical Public Service  DB scheme) is therefore 60/80ths, then yes the individual could fund for an additional 60/80ths through an AVC fund. 
The 20 year minimum requirement for the max lump sum is based on the job you are retiring from. If you only had 1 year’s service in your last role, then you are very very limited in what pension benefits can be provided from that employment. But presumably you may have pension benefits from previous employments. Options there will depend on a number of variables.


----------



## Pieface (14 Jan 2019)

If tax free lump sum is €120k (150% of final salary), how will the remainder AVCs be taxed if taken as out a lump sum too?  I know it’s tax free till €200k and then 20% to €500k. But in this instance, is it the next €300k (121-421)at 20% or is it €121-500 at 20%? If I am going to be a 40% tax payer when I retire, it might still be worthwhile to take lump sum at 20% tax? I am still trying to figure out how much AVCs to contribute going forward.


----------



## MMATTAMM (14 Jan 2019)

Pieface said:


> If tax free lump sum is €120k (150% of final salary), how will the remainder AVCs be taxed if taken as out a lump sum too?  I know it’s tax free till €200k and then 20% to €500k. But in this instance, is it the next €300k (121-421)at 20% or is it €121-500 at 20%? If I am going to be a 40% tax payer when I retire, it might still be worthwhile to take lump sum at 20% tax? I am still trying to figure out how much AVCs to contribute going forward.



My understanding is that any AVCs in excess of the 120k given in your example cannot be taken as lump sum and instead an annuity/ARF must be purchased.

I am pondering the same question as you though, at what point does it no longer make  sense to pay into an AVC


----------



## Early Riser (14 Jan 2019)

Gordon Gekko said:


> e.g. does a departing 50 year old on €80k a year and with €60k worth of AVCs get his/her €120k immediately, or does he/she have to wait 10 years until NRA?
> 
> I thought all that Cost Neutral Retirement stuff would kick in



Gordon, From looking at the Tax and Duty Manual (Revenue) I think your 50 year old in this example would be limited to a tax free lump sum of €80000. This is calculated as €120k*20/30, where €120k is the maximum receiveable, 20 years the actual length of service and 30 the potential service to NRA. See Section 9.4 :

https://www.revenue.ie/en/tax-professionals/tdm/pensions/chapter-09.pdf


----------



## Conan (14 Jan 2019)

Pieface 
If in your example the max lump sum is €120k, then any excess funds in an AVC pot must be used to either
- buy an Annuity, or
- invested into an ARF
Drawdowns from the ARF (minimum of 4% pa) are taxed as income (income tax plus USC). You can draw down an income gradually or you could draw down the full amount, but either way the drawdown is taxed as income in the year.
It’s only tax-free up to €200k if the 150% of Salary exceeds €200k. So if you retired on a salary of €160k, you could potentially get a retirement lump sum of €240k, the first €200k of which is tax free with the remainder (€40k) taxed at 20%. So in your example, the retirement lump sum is limited to €120k, end of. Any excess funds, even if drawn down immediately are taxed at marginal Income Tax (not 20%).
So as I said earlier, it is questionable whether it is tax effective to contribute AVCs which if converted into income would be taxed at 40% Income Tax plus USC. Using AVCs to maximize the retirement lump sum makes sense.


----------



## johnl68 (15 Jan 2019)

Early Riser said:


> In the Public Service, at least, the departing 50 year old would not get €120K if taking cost neutral early retirement. Even if he/she had more than €60k in the AVC fund to "compensate" for the actuarially reduced PS lump sum, it still would not work. The 150% of final salary tax free is reduced as well if taking cost neutral early retirement. I don't recall off hand what the reduced percentage (per year) is. I assume that if the retiring 50 year old opted for a preserved pension they would get the €120k at 60 - although charges may somewhat deplete the AVC fund in the meantime.
> 
> A pre 2004 PS can (not must) retire from 60 without actuarial reduction. Your example could only apply in the PS to a pre 2004 entrant. For post - 2004, cost neutral retirement is only available from 55 with NRA at 65. There are exceptions (eg Gardai).
> 
> I assume similar would apply to a DB scheme in the private sector - if the scheme  allowed cost neutral early retirement.



I was sold AVC's on the understanding that if I choose to retire early under cost neutral conditions after 20years service I would be able to bump up my lump sum to 150% of salary. According to the above that's not the case?


----------



## Gordon Gekko (15 Jan 2019)

johnl68 said:


> I was sold AVC's on the understanding that if I choose to retire early under cost neutral conditions after 20years service I would be able to bump up my lump sum to 150% of salary. According to the above that's not the case?



I would have thought that that you can.

I am not an expert on this stuff, but I’d have thought you get your AVC bit tax free and the DB bit is reduced actuarially.

That’s based on what I’ve read here.


----------



## Early Riser (15 Jan 2019)

johnl68 said:


> I was sold AVC's on the understanding that if I choose to retire early under cost neutral conditions after 20years service I would be able to bump up my lump sum to 150% of salary. According to the above that's not the case?





Gordon Gekko said:


> I’d have thought you get your AVC bit tax free and the DB bit is reduced actuarially



When retiring with AVCs  before NRA in the Public Service there are two issues to consider regarding the tax free lump sum - the actuarial reduction to the Occupational Pension lump sum and the Revenue's rules.

Going back to the example given previously by Gordon in Posts 6 and 9. After 20 years of service and retiring at 50 this person would have her Occupational lump sum reduced from €60000 to approximately €49300. But the revenue max tax free limit is also reduced. By my reckoning it is reduced from €120k to €80k. So this person could also take approx €31k from her AVC fund tax free. However, if she opted for a preserved pension, the main scheme reduction would not apply and I don't think the revenue one would either (not sure on this).

I am not certain of the actual Revenue calculation but there is a Revenue reduction in the max tax free lump sum allowed (in addition to the actuarial reduction to the main Occupational scheme) if taking Cost Neutral Early Retirement.


----------



## johnl68 (15 Jan 2019)

Thanks for that folks, I'll have to investigate. In my case I would have 22years service at 55, I thought that equated to 66/80ths lump sum and I could use avc's to fund remaining 54/80sths tax free.


----------



## Early Riser (15 Jan 2019)

Do check it out. There is a Revenue reduction to the max allowed. By my reckoning it will in your case it will be 22/27 of 120/80 of your pensionable salary (assuming you have a NRA of 60 - a pre 2004 entrant).

Don't forget that your 66/80 from the main scheme will also be actuarially reduced under cost neutral retirement. At 55 it is reduced to 91%. But you can use the two funds combined  to top up the lump sum to Revenue limits.


----------



## johnl68 (15 Jan 2019)

Thanks Early Riser. Jeez nothing is ever simple, I specifically gave the pensions dude my scenario of cost neutral early retirement at 55 and he was unequivocal in my ability to fund 120/80ths tax free. There's a chance I'm paying too much into the fund on this news.


----------



## johnl68 (15 Jan 2019)

I should have known not to take his calculations at face value, he looked about 12 and his handwriting was awful.


----------



## Gordon Gekko (15 Jan 2019)

johnl68 said:


> I should have known not to take his calculations at face value, he looked about 12 and his handwriting was awful.



I don’t look 12 but to say that my handwriting is childlike would be a heinous insult to children everywhere.


----------



## Early Riser (15 Jan 2019)

I'm another one very grateful for the word processor!


----------



## Conan (15 Jan 2019)

If one retires earlier than Normal Pension Age, then under Revenue rules the benefits must be reduced. So if one was entitled to a lump sum of 150% of Salary  at say age 65, then by retiring at age (say) 55, the maximum lump sum will be reduced. 
It is not possible to fund 150% of Salary as a lump sum if you are planning to retire early at age 55. So John, if you were told otherwise, it’s wrong. That’s not to say that if you did retire early and your overall benefits are reduced (Pension and Lump Sum) that there may not be some scope for using AVCs to fund any potential shortfall between the early retirement benefits under the Scheme and the Revenue maximum early retirement benefits.


----------



## johnl68 (15 Jan 2019)

That's true Conan, there will be a surplus of avc's left over. I did the sums based on Early Riser's figures and it's not so bad. The remaing funds then transfer to an AMRF.


----------



## Gordon Gekko (15 Jan 2019)

johnl68 said:


> That's true Conan, there will be a surplus of avc's left over. I did the sums based on Early Riser's figures and it's not so bad. The remaing funds then transfer to an AMRF.



Surely not on the basis that the punter has guaranteed specified income greater than €12,700?


----------



## Pieface (16 Jan 2019)

Pieface said:


> This thing about 20 years service allowing 150% of final salary perplexes me. What if in your final job before retirement you only have 1 year of service but in your whole life you have worked more than 20 years? How do you calculate the tax free lump sum then?



What if the final role before retirement is in a new company and with a lower salary than the previous one? Let’s assume I will have worked for more than 30 years in various roles. Will my final total tax free retirement lump sum (taking account all roles) work out to be lower? Just trying to work if it is worth it to semi retire by moving to a job that I would enjoy more but with a lower salary or maybe even work part time without moving to a another company.


----------



## Cormac (3 Apr 2019)

*Deleted*


----------

