PRSA Public Sector and Self Employed

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Foxirl

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Hi,

Currently Employed in Public sector. Will be retiring at 65 with 34 years service.
Also self employed on a part time basis. Profits for 2018 were quite small so my tax bill for 2018 will also be small. However projected profits for 2019 will be around 6,000 so roughly a €3000 tax bill as already on higher tax rate though PAYE.

What are my options relation to PRSA or AVC PRSA to reduce my tax bill.
Can I make a PRSA contribution of 6,000 to avail of a pension tax credit of circa 3,000 to offset the tax liability or can I only make a contribution of 1500 (ie 25% of 6000, Aged 41). Does this contribution have to be made in 2019 or is it made in 2020?

Also can I contribute to an AVC to bring my tax lump sum to 150% of salary for public sector as will be missing 6 years? Does this have to be a spate PRSA?

Will go for profession advice before year end but want to get my head around it first.

Thanks
 
The amount you get tax relief on depends on your age

Citizens Information website:
Age Amount which qualifies for tax relief
Under 30 years 15% of net relevant earnings
30 to 39 years 20%
40 to 49 years 25%
50 to 54 years: 30%
55 to 59 years 35%
60 and over 40%

From Irish Life website:
If you decide to make a once-off lump sum payment into your pension before the 31October you can still qualify for a tax relief in respect of the previous year
You should note that you will need to have lodged your claim for tax relief with your local Inspector of Taxes by 31October in any year in order for your application for tax relief to be considered by the Inspector of Taxes. Tax relief is not guaranteed and is at the discretion of your local Inspector of Taxes.
 
If you are retiring with 34 years service from the PS, then you retirement lump sum will be 34x3/80, so 102/80ths of Final Salary. Under Revenue rules once you have 20+ years service, you could get a lump sum of 120/80ths (150% of Salary).
So in terms of planning, I think you should firstly focus any additional pension contributions on maximizing the retirement lump sum. And since the 150% of Salary (up to €200,000) is tax free, then leaving 18/80ths of tax free money behind is not good financial planning. So look at AVCs under the Public Sector scheme to maximize the tax-free lump sum. This could be under any attached AVC plan or under a Stand Alone PRSA AVC Plan.
If you have the capability to invest further pension contributions, then you could look at setting up a PRSA in respect of your Self Employed income.
 
So basically if I am understanding what you are saying, as an example if my final salary in the public sector is 100,000 (for ease of calculation) after 34 years my lump sum would be 34x3/80 x 100000 = €127,500
My Pension would be 34/80 * 100000 = €42500 (including OAP)

If I make AVC contributions and on my retirement date I have at 50,000 in the AVC fund I can use 32,500 to fund the lump sum shortfall and add 17,500 to an ARF.

In relation to my self employed PRSA if I build up a fund in that of lets say 300,000, can I also then take 25% of that as a tax free lump sum even though I will already have taken 1.5 time my final salary?
 
Foxirl
Your numbers are correct. A couple of points:
- Maximising your tax -free lump sum is the most tax-effective investment strategy. You get tax relief at 40% on the contributions, the fund grows tax-free and you get the lump sum back tax-free (subject to the then rules).
- contributing more via AVCs will result in the excess AVC fund having to be used either to buy an Annuity or invested into an ARF. This will result in an additional pension income (on top of your Public Sector Pension) and such will be taxable (currently at 40% + USC).
- if you build up a self-employed PRSA, yes you can 25% as a retirement lump sum. But in total (between both schemes) the max tax-free is currently €200,000. Any excess over €200,000 is taxable at 20% (up to a total of €500,000). These limits may well increase over the next 24 years, but who knows.
 
Conan said:
Foxirl
Your numbers are correct. A couple of points:
- Maximising your tax -free lump sum is the most tax-effective investment strategy. You get tax relief at 40% on the contributions, the fund grows tax-free and you get the lump sum back tax-free (subject to the then rules).
- contributing more via AVCs will result in the excess AVC fund having to be used either to buy an Annuity or invested into an ARF. This will result in an additional pension income (on top of your Public Sector Pension) and such will be taxable (currently at 40% + USC).
- if you build up a self-employed PRSA, yes you can 25% as a retirement lump sum. But in total (between both schemes) the max tax-free is currently €200,000. Any excess over €200,000 is taxable at 20% (up to a total of €500,000). These limits may well increase over the next 24 years, but who knows.
Click to expand...
Thanks a million Conan. Don't think I need worry about the 200,000 limit as its unlikely I'll reach it. Was just using the 100,000 figure for ease of calculations.

In the event that I wish to retire earlier for example at age 60 can I use preserved benefits for the public sector pension and take them at 65 but take my PRSA at age 60?
 
Foxirl
The Occupational Pension and Self Employed pension are separate, so you can access one before the other.
 
@Foxirl

Revenue Tax Briefing 74 deals with dual income so you should familiarise yourself with that.

You must use up all the tax relief (age related limits - 25%?) from your PS salary before looking at other income. If you're paying 6.5% to your PS scheme you must put the full 18.5% balance into an AVC related to that employment before you look at SE income for tax relief purposes.

That's your first question to the advisor - "Are you familiar with Tax Briefing 74?"

Gerard

www.prsa.ie
 
Gerard,
Good point, I forgot that “wrinkle “. Also worth bearing in mind the overall earnings cap of €115,000 for tax-relieved pension contributions.
 
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