Quick questions on PRSAs and AVCs

E

Ent319

Registered User
Messages
120
I've a few quick questions on PRSAs and AVCs that I suspect someone in the know here should be able to answer quickly:

1. Are PRSAs that are not set up as AVCs to an occupational pension scheme subject to any total funding limits other than the 2million standard fund threshold (SFT)? For example, if you're in an occupational scheme the revenue limit on total pension benefits after 40 years service including AVCs is 2/3 final salary. Does any equivalent limit other than than the SFT exist for someone contributing to a PRSA that isn't set up as an AVC? Obviously for the purposes of calculating whether the SFT has been reached any pension benefits someone has accrued under occupational schemes over the course of their life need to be taken into consideration.

2. I don't think it's possible but I just wanted to check: is it possible for someone who's currently contributing to an occupational pension scheme to set up a separate PRSA that is not regarded as an AVC? Or is their only option for making further pension contributions to make AVCs or set up a PRSA-AVC?

I'm asking because intuitively it seems weird to that people in occupational schemes would be arbitrarily subject to lower total funding limits. Maybe I've missed something?
 
Gordon Gekko said:
No, there’s the €2m/€2.15m limit and the age-related limits.
Click to expand...

That seems super weird to me though.

Take someone whose salary is €30,000 PA.

If that person is a member of an occupational scheme, the total limit on the value of their pension fund (including any AVCs) would be the capital equivalent of 20k according to their circumstances (married, non married etc ...).

If that person is not a member of an occupational scheme and contributes to a standalone PRSA, the total capital value of their pension can exceed what they might get as 2/3 salary (though this might be difficult to reach in practice).

What's the policy justification for the difference in treatment?
 
They’re different things though.

The rules in relation to what someone can put in himself/herself are the same.

With an occupational scheme, there’s a third party involved in the funding, i.e. the employer.
 
Gordon Gekko said:
They’re different things though.

The rules in relation to what someone can put in himself/herself are the same.

With an occupational scheme, there’s a third party involved in the funding, i.e. the employer.
Click to expand...

Is the total value of someone’s pension benefits not more limited though if they’re a member of an occupational scheme (2/3rd final salary rule kicks in) and they can’t set up a separate / standalone PRSA?
 
Last edited:
To give more context for where I’m coming from here: a pension is obviously one of the best ways to invest your money in Ireland. Based on my understanding (which might be wrong!) it would seem as if your ability to invest in pension products is arbitrarily limited if you’re a member of an occupational scheme as the 2/3 salary rule kicks in, rather than being subject to the 2m SFT threshold
 
Ent319 said:
To give more context for where I’m coming from here: a pension is obviously one of the best ways to invest your money in Ireland. Based on my understanding (which might be wrong!) it would seem as if your ability to invest in pension products is arbitrarily limited if you’re a member of an occupational scheme as the 2/3 salary rule kicks in.
Click to expand...

Ah, it isn’t really. When you run the numbers, the fund is capped at the amount required to purchase an annuity that would deliver a pension equal to 2/3 of final salary. Which in this day and age is a huge number.
 
If you have a good pension, decent salary, good investment discipline and a long period of time, the 2/3rd salary rule could in practice be quite limiting though right?

For example, compare two people with 50k salary, one in an occupational scheme that provides 50% salary less state pension and the other with an arrangement where contributions to a PRSA are matched by the employer.

Over 30 - 40 years, the person with the PRSA could foreseeably make a boatload more money than the capital equivalent of 36k p.a. that the person in the occupational scheme might be able to amass from benefits from their scheme and AVCs.

Say average contributions of 20% salary are maintained by the person making PRSA contributions for 40 years at 7.2% interest. Capital value of pension would be 2.3 million - which dwarfs capital value of 36k p.a. This can also be passed on to successors. Extreme example but illustrates the point?
 
If I’ve read the revenue pensions manual right, capital value of 36k PA for someone my age would be approx 650k for an unmarried person and 1 million for a married person.
 
Although I suppose what I’m not factoring in is that the person in the occupational pension scheme might accrue their benefits at less than their true cost ....
 
I think you are confusing how the Revenue limits work.
If you are in a DB scheme, the Revenue max benefit is :
- a pension of 2/3 of Salary (including any lump sum commutation)
- a Spouses Pension on your death in retirement equal to 100% of the members pension
- indexation of pensions in payment
In addition to the above, the Revenue also calculate a notional capital value of any benefit package at retirement in order to determine whether the €2m excess of fund tax might also kick in.
In a D.C. scheme the Revenue limits that apply are:
- a limit on the amount of tax relief available as a contribution each year, and
- the €2m fund cap at retirement
As a comparison, the Revenue limits are more generous for DB schemes. If you had a D.C. fund of €2m and wanted to buy a joint life indexed Annuity (though hardly any would) you would struggle to get an Annuity higher than €50k. But the equivalent €50k in a DB scheme would be valued at less than €2m for the excess of fund tax calculation.
 
Isn’t having access to a 2 million DC pension pot that can be invested and potentially grow even further in an ARF / be passed on to your estate worth more than entitlements to an annuity / DB payments that expire when you croak? You could live off just the interest from the ARF.

Edit - also thanks for setting the limits out like that, I actually was confused about the differences in treatment of limits between DB and DC schemes
 
Last edited:
You must log in or register to reply here.
Back
Top