Additional AVC's with no tax relief?

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Bearsandbulls

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Hi Folks

Quick background
Both myself and partner are mid 30s, working and building savings. Have 2 young children aged 1 and 2. In the fortunate position to own property with no mortgage and no intention to move for the forseeable future.

I am contributing max AVC's for tax relief, partner is currently on unpaid maternity this year so cannot contribute AVC for tax relief.

We currently have approximately 40k cash sitting in an account doing nothing. I had this invested in equities but withdrew back in December as I didnt like what was happening in the market.

Question: Is it worthwhile putting extra cash into AVC while the market is somewhat at a discount? There would be no tax relief on this addiitonal injection but it will be taxed at a lower rate than normal equity investing when the time comes. Pension fees/charges from our company scheme are very competitive. Would keep 6 months expenses aside as an emergency fund also.

If this isnt the recommendation, what else is suggested?
 
Bearsandbulls said:
We currently have approximately 40k cash sitting in an account doing nothing. I had this invested in equities but withdrew back in December as I didnt like what was happening in the market.
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If you really want to be invested in equities it makes more sense of course to do it inside a pension fund and benefit from CGT-free accumulation.

It depends on what your time horizon is. If you are looking at decades then for sure it makes more sense to make AVCs even without the tax relief.
 
My suggestion would be to invest the €40k in (tax-free) State Savings Certificates and to maintain a 100% allocation to global equities in your pension funds for the time being.

It's important to consider your overall asset allocation and not to look at any individual account in isolation.
 
Bearsandbulls said:
There would be no tax relief on this addiitonal injection but it will be taxed at a lower rate than normal equity investing when the time comes.
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You put in €40k now.
Assuming no change in the pension rules, you will get back €10k + 25% of any growth, tax-free.
You will pay 40% tax on the €30k and on any growth.

As you have the very rare skill of being able to predict the movements of the stockmarket, you should invest the €40k directly in the stock market and not via a pension fund. You will have access to this cash. And in later years, when you might have higher expenses you can feed it into your pension fund.

Correction: I had not realised or had forgotten that you can carry any unused tax relief forward. So maybe it is worth doing, assuming that you will be able to avail of this tax relief at 40% in the future.

Brendan
 
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Brendan Burgess said:
You put in €40k now.
Assuming no change in the pension rules, you will get back €10k + 25% of any growth, tax-free.
You will pay 40% tax on the €30k and on any growth.

As you have the very rare skill of being able to predict the movements of the stockmarket, you should invest the €40k directly in the stock market and not via a pension fund. You will have access to this cash. And in later years, when you might have higher expenses you can feed it into your pension fund.

Brendan
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I certainly do not have that skill! I got lucky in December. I work in energy markets and was spooked by the spiralling energy costs so just went cautious. If i was able to time the market I wouldnt need to work or be looking for financial advice!

But thanks for breaking it down. Is it definitely 40% tax on the remainder or are you assuming my pension will be above €36,800 (or whatever the band level will be at that time). I dont think it will be to be honest, I would probably look to retire a bit earlier if it was.

It's the tax free 10k and 25% of growth that interests me. Is this a better option than say the state savings mentioned in the previous post?
 
You could invest the 40k in AVCs now and in future years you could claim the tax relief on some of the 40k as part for your allowance for those future years. You would have the advantage of possible gains on your 40k over a longer period.
 
If you are unable to claim the tax relief in the future as Conan said, the question of whether it is worthwhile depends on your tax rate at retirement.

Money in a pension, 25% tax free and the remainder is taxed under PAYE. That included capital and growth.

Invest the money and just the growth is taxed, the capital is not.

If you are taxed at 20% plus USC and PRSI (up to age 65), it is more tax efficient to have the money in a pension. If taxed at 40%, it is more beneficial to invest it personally.

There is also the situation of what if you need the money at some stage over the next 30 years. Put the money into a pension now, you can't get the money until you retire. 30 years is a long time, another lifetime for you, so just think of all the twists and turns that your life has taken and try to predict what another lifetime will throw at you.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
 
thanks everyone for the good points. I am leaning towards putting it into the pension. Appreciate what is being said about not having access to funds but would hope to continue building savings anyway
 
Bearsandbulls said:
thanks everyone for the good points. I am leaning towards putting it into the pension. Appreciate what is being said about not having access to funds but would hope to continue building savings anyway
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Assuming your fees are 0.25% or less?

In which case it could work for you, anyone with fees of say ~1% it's a different story so adding this example to illustrate it's not a good approach for everyone.

E.G
Outside a pension
40,000 over 30 years at 7% would get you to 326,000 - then 33% CGT bringing you to 232,000

In a pension
40,000 over 30 years at 7%-1%fee would get you to 241,000
Of which you get the usual pension restrictions and more fees on drawdown.

(Gross simplification and very optimistic returns but indicative)
 
thanks ashambles, i followed your logic and put the numbers into a sheet. my fees are indeed 0.25% and even when that low, it makes more sense to invest outside of a pension. thanks everyone for their suggestions
 
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