AVC drawdown at retirement?

[Confused28]

Hello.
I’m just trying to get things straight in my mind as regards AVC’s and drawdown at retirement, if anyone can set me straight.

I have been contributing to an AVC for a number of years and taught I understood fully but now I’m not so sure. I’ve recently been thinking of increasing contributions, the reason they are on my mind presently but now wondering is there any point!

I am the best part of 20 years from retirement so have time but important to be moving in the right direction!

If I retire at 65 I will have 40 years pensionable service done and will receive an occupational pension and state contributory pension when I reach the required age.

So to illustrate my current understanding of the situation I will say I will retire at 65 having completed 40 year’s service and I will say my final salary is €100000 and the value of my AVC’s is €300000 (figures approximate for illustration purposes).

1.So as part of my occupational pension I will receive a tax free lump sum of €150000. Now my understanding to date of AVC’s was that I could take €50000 tax free from my AVC pot topping up my tax free lump sum to €200000. I could then take the remaining €250000 taxed at 20%.

2.Now I am beginning to think this possibly is not correct and AVC drawdown and tax free lump sums are strictly based on your final salary. So if you work a full 40 years service your tax free lump sum is strictly what your occupational pension pays out, ie. 1.5xfinal salary. And in my case anything in an AVC would have to be used to purchased an ARF and anything drawn from it would be taxed at the marginal rate? Or I could take the entire AVC pot, €300000 taxed at 20%? Keeping it below €500000 in total.

So basically can anyone set me straight? Is one or two above correct or neither? Is there any point in even having an AVC if I complete a full 40 years let alone continuing with what I have or increasing contributions. Obviously if I decide to go earlier, which is possible AVC’a would be more relevant and make up any shortfall.

Apologies if in wrong section or specifically been answered before but having read a number of posts, I still don’t completely understand.

Thanks.

 

[S class]

Your AVCs will be subject to the rules of your occupational pension. So if that if 1.5 times final salary you will be limited in how much extra tax free is available from your AVCs.

There are a few different revenue allowable rules for calculating maximum tax free lump sum. It's not strictly based on your final year's salary.

The calculation method used by your occupational scheme probably won't result in the revenue maximum amount.

If you have overtime or bonus payments you could gain some extra tax free lump sum from your AVCs.

Any further lump sum taken from your AVCs would be taxed at your marginal rate.

 

[Confused28]

Hi. Thanks for response. Very helpful and I ended up finding a similar thread, again with helpful responses.
I have a clearer understanding now.

Looks like I’ll need to consider retiring at 60 so!, if I want to actually get any benefit from AVC contributions!

Thanks.

 

[Confused28]

Your AVCs will be subject to the rules of your occupational pension. So if that if 1.5 times final salary you will be limited in how much extra tax free is available from your AVCs.

There are a few different revenue allowable rules for calculating maximum tax free lump sum. It's not strictly based on your final year's salary.

The calculation method used by your occupational scheme probably won't result in the revenue maximum amount.

If you have overtime or bonus payments you could gain some extra tax free lump sum from your AVCs.

Any further lump sum taken from your AVCs would be taxed at your marginal rate.

 

[Confused28]

Your AVCs will be subject to the rules of your occupational pension. So if that if 1.5 times final salary you will be limited in how much extra tax free is available from your AVCs.

There are a few different revenue allowable rules for calculating maximum tax free lump sum. It's not strictly based on your final year's salary.

The calculation method used by your occupational scheme probably won't result in the revenue maximum amount.

If you have overtime or bonus payments you could gain some extra tax free lump sum from your AVCs.

Any further lump sum taken from your AVCs would be taxed at your marginal rate.

Very helpful. Thanks again.

Upon further reading I came across PRSA AVC “overpayment” which now has me slightly Confused!

I am not sure how this would happen unless I breached the age related percentages for pension contributions which includes both superannuation and AVC’s which I don’t.

I understand revenue don’t want people taking advantage of tax breaks etc but If I have overshot it and accumulated too much, I will be paying the tax/prsi/usc after transferring to and withdrawing from an ARF?

I understand the maximum benefit payable as a pension cannot exceed 2/3rd of final salary. Perhaps this is what is ment about overpaying? But surely this is when you are making withdrawals from an ARF rather than paying AVC’s. I mean if you don’t know exactly when you intend on retiring or when you will die, how do you know if pension pot is sufficient!

My strategy I think will be to continue paying AVC’s and reviewing contributions every few years, aiming for an AVC pot where I can transfer to an ARF and withdraw an amount of between 4% (the required withdrawal) and an amount that keeps total pension below 2/3rds final salary, which can be sustained for 20 years . I think this is best for now as I’m unsure if I want to retire early, or go to 65 in which case I will have 40 years service completed. If this is the case I can reduce or cease contributions as years go by.

So if anyone has any insight on this “overpayment” and if I’m getting it drastically wrong or if it’s anything other than breaching the age related percentage contribution limit or withdrawing a amount that would breach 2/3rd final salary pension limit, please do say.
Thanks

 

[S class]

At retirement you can have a pension of 2/3rds final salary + an ARF or Annuity funded from your AVCs.

You do not have to limit drawdowns from an ARF in order to keep your total retirement earnings at a level not exceeding 2/3rds of final salary.

Drawdowns from an ARF are taxed at your marginal rate.
Marginal rate USC also applies.
Prsi applies up to the date you start your Contributory Pension or upon reaching age 70.

The overpayment is probably referring to overfunding.
There is a maximum level of funds allowed in a person's pension.
The rules for calculating this are complex.
The AVC provider is required to check for any possibility of overfunding.

In practice it is unlikely that you would be overfunded as a result of maximizing your yearly tax allowable pension contributions.

 

[Dave Vanian]

If it helps, the calculation around overfunding is a calculation that works out how much of a fund you would need to provide a pension of 2/3 final salary. Even if you plan to take an ARF at retirement, the overfunding calculation allows you to assume that you'll buy the most expensive annuity, with 100% spouse's pension (if you're married), escalation on pensions, 10-year guarantee etc. That calculation gives you a maximum fund that you must not exceed.

 

[Ruffian]

At retirement you can have a pension of 2/3rds final salary + an ARF or Annuity funded from your AVCs.

I think this is inaccurate.

For a DB pension the maximum pension fund allowed by Revenue is to the equivalent of 2/3 of pensionable salary + allowances. The 2/3 limit is inclusive of AVCs. For the public service this 2/3 limit was given effect by a "full" pension of 0.5 of pensionable salary (and pensionable allowances), plus a lump sum of 1.5 pensionable salary, plus a survivor pension of 0.5 of the retiree's pension. There is still a small bit of space for leeway (eg, allowances which are not pensionable and some other variables such as a larger survivor pension)) but not a vast amount. So generally Class D public servants who have (or will have) full 40 years service have little scope for AVCs. Revenue has a formula for capitalizing these pension components and any other variables to maintain the overall 2/3 limit.

The situation is different for public servants who pay Class A PRSI (as all post-1995 entrants do). For them a full 40 year pension is 0.5 pensionable salary minus the State Pension (which is paid separately). Revenue do not take the State Pension component into account when calculating the 2/3 of salary limit. So even with 40 years of service these public servants have scope for substantial AVC funding. Of course the potential drawback is that any drawdowns are subject to USC and tax - which might be at the top 40% level. And highly paid PSs need to be careful not to get caught by the Standard Fund Threshold - currently €2m but increasing to €2.8m by 2029.

I'm not sure but don't think @Confused28 indicated whether he is a public servant and, if so, whether he is Class D or Class A.

 

[Dave Vanian]

I think this is inaccurate.

For a DB pension the maximum pension fund allowed by Revenue is to the equivalent of 2/3 of pensionable salary + allowances. The 2/3 limit is inclusive of AVCs. For the public service this 2/3 limit was given effect by a "full" pension of 0.5 of pensionable salary (and pensionable allowances), plus a lump sum of 1.5 pensionable salary, plus a survivor pension of 0.5 of the retiree's pension. There is still a small bit of space for leeway (eg, allowances which are not pensionable and some other variables such as a larger survivor pension)) but not a vast amount. So generally Class D public servants who have (or will have) full 40 years service have little scope for AVCs. Revenue has a formula for capitalizing these pension components and any other variables to maintain the overall 2/3 limit.

The situation is different for public servants who pay Class A PRSI (as all post-1995 entrants do). For them a full 40 year pension is 0.5 pensionable salary minus the State Pension (which is paid separately). Revenue do not take the State Pension component into account when calculating the 2/3 of salary limit. So even with 40 years of service these public servants have scope for substantial AVC funding. Of course the potential drawback is that any drawdowns are subject to USC and tax - which might be at the top 40% level. And highly paid PSs need to be careful not to get caught by the Standard Fund Threshold - currently €2m but increasing to €2.8m by 2029.

I'm not sure but don't think @Confused28 indicated whether he is a public servant and, if so, whether he is Class D or Class A.

For no compelling reason I assumed that @Confused28 is private sector and worded my reply accordingly. (The first post refers to occupational pensions. While a public service pension is indeed an occupational pension, most public servants I know refer to them as public service pensions.) But I am reminded of the old saying that to ASSUME makes an ASS out of U and ME. Many of the same principles apply to calculation of AVC overfunding in the public service but as you say, a Class D public servant with 40 years' service at retirement would have little scope for building up AVCs.

Anyway, it would probably be useful if @Confused28 could clarify if they are private sector DB, private sector DC or public sector.

 

[Confused28]

Hello all.
Very informative responses, thank you.
Apologies for lack of information and mixing up some terms.

I am in the public sector, Class A PRSI. Post 1995, pre 2004

 

[S class]

Post in thread 'AVC Limit to aim for'

AVC Limit to aim for

Im 36 and have DB pension plan which including current state pension would give me approx 50k a year when retired, this will go up as time goes on as its career average pension. I max out my avcs of 20% and my employer contributes 3%. Will have near 100k in that by end of the year. Have...

www.askaboutmoney.com

If you are in a DB scheme, the max overall pension you can get (inclusive of any AVC pot) is 2/3rds Final Salary (inclusive of the Retirement Lump Sum) plus a Spouses Pension on your death in retirement of 100% of your pension plus indexation up to a max of CPI.
So depending of your DB benefits, service etc, you need to make sure any AVC'S will not lead to overfunding. So you should consult with your scheme advisors to ensure you aren't likely to overfund.

I think this is inaccurate.

It is allowable to make AVCs to fund for a surviving spouses pension up to the rmaximim revenue allowable limit.

This is 100% of the employees pension.

The maximum surviving spouses pension in the Public Sector is 50% of the employees pension.

These AVCs can then be used to buy an ARF, or an Annuity or can be taken as a taxable lump sum at retirement.

I worked in Public Sector class D for almost 39 years.
I currently have almost full PS pension + ARF drawdowns which take my overall retirement earnings way above 40/80ths of my final salary.

This is allowable despite what certain other posters may state.

An extra bonus in having my allowable ARF was the ability to gain many years of class S Prsi contributions, which have allowed me to qualify for 180.70 euro per week Contributory Pension.

 

[Ruffian]

Hello all.
Very informative responses, thank you.
Apologies for lack of information and mixing up some terms.

I am in the public sector, Class A PRSI. Post 1995, pre 2004

In that case you can retire normally at 60 when I assume you will have 35 years service. Your lump sum from the PS scheme will be 105/120 of pensionable salary and you can use some of your AVC to top up to 120/80. The rest you can use for either an annuity or an ARF to augment your PS pension. If you are not in insurable employment after 60 you should be eligible for a Supplementary Pension to take you up to State Pension age - at the rate of 35/40 of the full State Pension.

If you retire at 65 with 40 years service you will get your full lump sum from the PS scheme so there is no scope to top up here from the AVC. This you will have to use for an ARF or an annuity - subject to USC and income tax in the normal way on drawdown. The only caution is not to exceed the Standard Fund Threshold - and if your ballpark salary is the €100,000 you mentioned in your first post this should not be an issue.

 

[Confused28]

Thanks everyone for responding. Lots of great advice.

 

[lawoman]

Post in thread 'AVC Limit to aim for'

AVC Limit to aim for

Im 36 and have DB pension plan which including current state pension would give me approx 50k a year when retired, this will go up as time goes on as its career average pension. I max out my avcs of 20% and my employer contributes 3%. Will have near 100k in that by end of the year. Have...

www.askaboutmoney.com

It is allowable to make AVCs to fund for a surviving spouses pension up to the rmaximim revenue allowable limit.

This is 100% of the employees pension.

The maximum surviving spouses pension in the Public Sector is 50% of the employees pension.

These AVCs can then be used to buy an ARF, or an Annuity or can be taken as a taxable lump sum at retirement.

I worked in Public Sector class D for almost 39 years.
I currently have almost full PS pension + ARF drawdowns which take my overall retirement earnings way above 40/80ths of my final salary.

This is allowable despite what certain other posters may state.

An extra bonus in having my allowable ARF was the ability to gain many years of class S Prsi contributions, which have allowed me to qualify for 180.70 euro per week Contributory Pension.

This is really confusing .
You say that you were a Class D public servant for almost full service and are now receiving an almost full PS pension plus whatever amount you wish from an ARF which presumably converted from an AVC at your retirement .
Yet some posters are adamant that this isn’t possible ?

 

[S class]

I am living proof that this is possible.

I have my Public Sector pension since 2018.
My ARF started at the same time and all funds in my ARF were from AVCs related to my Public Sector income.

I had an ongoing dispute regarding my Public Sector pension which necessitated a full review of my AVCs at retirement age.
This review proved that I was not overfunded.
At retirement, after taking all possible tax free lump sum from my AVCs to take my overall Public Sector lump to the maximum revenue allowed limit, I had 183k remaining AVCs.

It was fully allowable to use these AVCs to set up my ARF.
To date after 6 years of ARF yearly drawdowns my ARF is now valued at 305k.

While the AVCs and AVC PRSA which I funded during my employment had to be linked with my Public Sector Pension, my ARF is not in any way linked with my Public Sector Pension.

When I took benefits from my Public Sector AVCs and AVC PRSA any existing link with my Public Sector Pension ended.

I am free to drawdown any amount of my own choosing from my ARF.

 

[Conan]

I am living proof that this is possible.

I have my Public Sector pension since 2018.
My ARF started at the same time and all funds in my ARF were from AVCs related to my Public Sector income.

I had an ongoing dispute regarding my Public Sector pension which necessitated a full review of my AVCs at retirement age.
This review proved that I was not overfunded.
At retirement, after taking all possible tax free lump sum from my AVCs to take my overall Public Sector lump to the maximum revenue allowed limit, I had 183k remaining AVCs.

It was fully allowable to use these AVCs to set up my ARF.
To date after 6 years of ARF yearly drawdowns my ARF is now valued at 305k.

While the AVCs and AVC PRSA I funded during my employment had to be lonked with my Public Sector Pension, my ARF is not in any way linked with my Public Sector Pension.

When I took benefits from my Public Sector AVCs and AVC PRSA any existing link with my Public Sector Pension ended.

I am free to drawdown any amount of my own choosing from my ARF.

I don’t doubt what you say, BUT:
- if you had 39 years Public Service then you “shortfall” was

3/80ths x Final Salary as a lump sum, plus

1/80 x Final Salary of pension
- the “cost” of that shortfall was probably fairly modest (no disrespect)
- the other “shortfall” between the above and Revenue maximum would be the contingent Spouses Pension which technically could be increased from 50% under the main scheme to 100%. But this is a contingent benefit, ie it only arises IF you predecease your spouse (so it might never arise).
- I am curious how somebody calculated you were not overfunded with an AVC of €183k. How did they value such a contingent benefit?

 

[S class]

I don't know how the calculation was done.

All my salary and pension details were scrutinized by an independent third party expert as specified in a judgment by the Pensions Ombudsman.

There is an AAM thread a few years ago where you and another poster discussed the method approved by revenue for calculation of this type of AVC funding.

This post contains a link to the revenue calculation method.

You can revert back to that thread to check how it's valued.

P.S. see link in post #23

 

[Louisval]

- the other “shortfall” between the above and Revenue maximum would be the contingent Spouses Pension which technically could be increased from 50% under the main scheme to 100%. But this is a contingent benefit, ie it only arises IF you predecease your spouse (so it might never arise).

It doesn't matter if it's contingent or not. The simple fact is that one is allowed to fund one's retirement up to Revenue max benefits. Revenue max benefits include fully funding for one's spouse. Based on the figures quoted, it seems completely plausible to me that S Class was within allowable limits.

 

[Ole1999]

I am living proof that this is possible.

I have my Public Sector pension since 2018.
My ARF started at the same time and all funds in my ARF were from AVCs related to my Public Sector income.

I had an ongoing dispute regarding my Public Sector pension which necessitated a full review of my AVCs at retirement age.
This review proved that I was not overfunded.
At retirement, after taking all possible tax free lump sum from my AVCs to take my overall Public Sector lump to the maximum revenue allowed limit, I had 183k remaining AVCs.

It was fully allowable to use these AVCs to set up my ARF.
To date after 6 years of ARF yearly drawdowns my ARF is now valued at 305k.

While the AVCs and AVC PRSA I funded during my employment had to be linked with my Public Sector Pension, my ARF is not in any way linked with my Public Sector Pension.

When I took benefits from my Public Sector AVCs and AVC PRSA any existing link with my Public Sector Pension ended.

I am free to drawdown any amount of my own choosing from my ARF.

Great info here @S class can you confirm your ARF has increased from 183k to 305k after taking approx 6 years of withdrawals from your ARF ?

 

[S class]

Great info here @S class can you confirm your ARF has increased from 183k to 305k after taking approx 6 years of withdrawals from your ARF ?

Yes that's how much it has increased after drawdowns. (Roughly 60k drawdowns taken so far.)
It is in Zurich International Equity.
As I have the security of my Public Sector Pension , I decided to keep my ARF in high risk funds.
So far it's doing very well.