AVCs & main scheme: which scheme can the lump sum payment be taken from?

If a person is paying avcs in addition to main scheme and has 40 years sevice at retirement is there any requirement as to which scheme the lump sum payment must be taken from ie from the main company scheme or from your own avc fund and which is the most benificial to retiree.

Thanks

Re: AVCs in private sector employment

Hi Rheinie,

I assume the main occupational scheme is a Defined Benefit Scheme, is this correct?

Ive also altered the title to reflect the question more accurately. If your not happy with the editing let me know.

aj

Sure title fine ,yes main scheme is DB just wondering which is the best from a financial point is it better to take lump sum from main scheme or to suplement it with any AVCs saved in seperate fund.thanks

No expert, but can I suggest possible pointers. Am in similar situation - 'buying' 15 years of service at a cost of €450k in AVCs to add to my notional (hopefully) 25 years in DB scheme.

Overall, taxman won't allow benefits to exceed two thirds final salary.

I'll move AVC fund to ARF on retirement (away from company) to spread risk. I assume ARF is less risky than our DB schemes i.e not dependent on company financial state.

How solid is your company going forward? Many DB schemes are now underfunded. If company closes, shortfall crystalises. i.e inadequate funds to pay full pension liabilities. In this case, would it be better to take the lumpsum from DB scheme (and run) and have your AVCs secure in separate ARF for future use? Pensions usually reduced by 9 : 1 (every €9 euro taken in cash cuts pension payout by €1).

While pension is based on finishing basic salary, my understanding is lumpsum is based on gross income (including extras), sometimes an average of final three years. i.e increases the amount of cash that can be taken. Good idea to check the fine print od your DB scheme and see exactly where the land lies on these issues.

I think you can draw lumpsum from both funds to max cash payout, if that is what's required. You can earn (couple ) €33k before being taxed if over 65 so it's a case of doing the figures to max income and reduce potential tax bill.

One other consideration: Finance Bill has a proposed 3pc mandatory drawdown of AVC funds yearly (taxman appalled at the millions salted away (out of his reach) into pension funds in recent times. Assuming I hit the €450k in AVCs, it means I must withdraw €15k a year 3pc) and pay tax at 42pc on it (asuming I have €33k of other income from DB pension plus PRSI pension).

A consultation with Liam D Ferguson is on my 'to do' list.

I know Conan and other knowledgeable contributors have an interest in this area and look forward to reading expert opinions here.

PS:
Myself and many others draw great benefits from the AAM community, and many thanks to those who unselfishly give unstinting time and expertise to all of us who benefit by it. K

Thanks Kirvos for the kind words.

Rheinie,

You should get a hold of the scheme booklet and check the rules concerning the lump sum payment. I know in my DB scheme the lumpsum comes out of the main scheme.

aj

Many thanks for replys and points outlined.I suppose like all DB schemes mine and company is a bit dodgey at the moment .When Kirvos says (consider take money and run ) is it possible to take money from company DB scheme and transfer it while still employed by company even though I have 40 years service I can not retire until normal retiring age which is 63 in our case.

Hi rheinie, ur follow-up is unclear to me. SOme points:

It is the case you may be making pension contributions, but won/t can't benefit from them! Rule 40/60 max rule applies. so even though you may make 44 years of contribs, the company can only pay 40/60 not 44/60ths of final salary.

I doubt very much you can "take money from DB plan and transfer it" --- where? You can only put AVC in AVC fund where you have some freedom with pot post-retirement.

I would, if i could, take the lumpsum from the DB scheme rather than AVC/ARF pot in case company had funding difficulties going forward.

HOw much scope have you for AVCs if you seem to/will have over 40 years of service? i.e max pension without any AVCs required.

HOpe this answers a little, but again you need to read the T&C of your DB plan and talk to pension administrator (Mercer?) of ur union rep or personel dept.
K

Thanks Kirvos for reply I think you have answered my fears in advising take lumpsum from DB scheme as there may be as you say a concern going forward.
Quote: how much scope have you for AVCs if you have over 40 years sevice i.e max pension without AVCs "
I will have over 40 years but have been advised to pay some AVCs which could be put into an ARF and money drawn down from it as required .Is this a true position or am I missing something.

I will have over 40 years but have been advised to pay some AVCs which could be put into an ARF and money drawn down from it as required .Is this a true position or am I missing something

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Most DB schemes limit the final payment to 40/60 of final salary (Gross) less the state pension.

You are allowed by law to take up to 40/60 of final salary per P60 without deduction of pension.

You can make up this shortfall (State pension) by contributing to ACV.

Hi asdf,

It might be just me but I dont fully understand your three sentences.

Rheinie,

Is your private sector DB scheme coordinated (sometimes known as integrated) with Social Welfare (Contributory OAP State Pension)?

aj

Hi all, sorry, I forgot about the co-ordinated/integrated angle. Extrapolating from my own situation where this does not apply i.e. social welfare element is not subtracted from finishing salary and pension based on the lower figure.

Accidently one of the luckier ones. From empirical evidence, I have a feeling many people do not understand/appreciate the downside of this factor, which would affect a lot (most?) recent schemes.

I don't want to go off-thread but, just to mention, any pension coverage in financial press should tease out/highlight the implications especially in pension planning for lower income groups who already only get tax relief on contibutions of 20pc - a major disincentive
K

I understand that the scheme is co-ordinated /integrated and social welfare element is subtracted and this was why AVCs were recomended to me to make up this shortfall ( have I got the correct thinking on this?)

Hi rheinie, As asdfg points out with precision above, yes is the answer to your last post (as I understand pension in and outs). On a related note, you pay PRSI to fund a contributory old age pension (should that be elderly in PC terms?). Why should DB or DC schemes factor in the PRSI element.?
I know firms pay 10.75pc PRSI on wages/salaries ( no ceiling at €39k approx as for staff/employees) towards the PRSI fund.
I can only assume this is the logic used to amalgamate the State and private pension elements together in schemes designated 'integrated'.

But...If you're married, and set to get €10k approx PRSI contributory pension for a PRSI eligible couple (both PRSI payers), does this mean each can only pay AVCs to make up €5k each or what is the lie of the land.? Any ideas rheinie from your queries?