AVCs

J

Joey G

Guest
I'm mid 40s and a member of a group pension scheme which at 65 promises two-thirds of final salary excluding state benefits. Currently I'm tossing 4,500 Euros per annum into my AVCs and the fund is worth 30,000-32,000 Euros. I'm thinking of upping my annual premium by another grand a year to perhaps 5,500 Euros to benefit from the tax incentives. My question. Can one overdo AVCs. Can one end up with too big a nest egg at retirement. I'm not sure but I think one can only withdraw a tax-free lump sum of 1+1/2 times final salary at age 65. Any views or advice would be helpful. Thanks
 
Yes you can overdo AVCs.
Firstly to invest AVCs there must be a shortfall between what your main scheme provides and the Revenue maximum. The maximum benefits which can be provided at reirement (main scheme + AVC scheme) is as follows:
* Member Pension of 2/3rds Final Salary
* Spouses Pension of 100% of Member Pension
* Indexation of pensions in retirement at CPI.

Your main scheme Trustees have a responsibility to ensure that you do not overfund through AVCs. So check exactly what your main scheme will provide and then get the Trustees to confirm that you are not overfunding through AVCs.
Unless your main scheme provides a Rolls Royce package of benefits, it is unlikely that your AVCs will overfund. Since you dont state your Salary and benefits I cannot be sure. But most Defined Benefit schemes do not provide Revenue max benefits and often shortfalls exist because:
* pension is based on basic salary, not gross taxable income (i.e. incl bonuses, BIK etc)
* the pension may be based on an average salary over the last 3 years rather than final salary
* the spouses pension may be less than 100% of members pension
* no provision is made for post retirement indexation.

In such a case it would be vey difficult for you to overfund, BUT you should check with the Trustees or the scheme advisors.
Also remember that you are limited to a maximum of 150% of final salary as a tax free lump sum on retirement (from all sources). Your AVC fund may not be usable to increase this figure, depending on how your main scheme calculates the tax free lump sum element. Any tax free lump sum taken from the main scheme reduces your 2/3rds pension by en equivalent pension value. However you can invest your AVC fund into an Approved Retirement Fund on retirement (as an alternative to converting the AVC fund into an additional annuity).
I hope this helps, but you should seek clarity from the Trustees/Advisors to be sure.
 
Reply to Conan

Thanks Conan for the time and effort.

A little clearer now but keep talking.
My pension scheme to provide a "Rolls Royce package of benefits" no way. My present flat gross salary is 40G. Should I up it a grand a year to 5.5K euro, as I have a bit of slack at the moment. Or would I be better off putting it on a horse. Give us a practical idea if you can. Thanks
 
AVc

If you are expecting a pension 2/3rds salary (cuurntly €40k) at age 65, then it may be that you cannot fund any more pension in your own right, other than :
* funding for addiding a widows pension payable to a surviving spouse on your prior death, and
* funding for a level of indexation on your 2/3rds pension in retirement.
But if these benefits are already provided in some format in your main scheme, then this may limit the scope for AVC.
An AVC contribution of €4,500 or €5,500 p.a. will build up a significant fund by age 65. You will need to make sure that you can use this fund to provide additional benefits all within Revenue limits. Otherwise you will simply reduce what the Employer provides.
If you can fund at a level of €5,500 p.a. then it is reasonable to do so (unless you horse is a "sure thing").
BUt in view of the numbers you are stating, I really think you should consult the Trustees/Advisor.
 
AVC

Conan :
The maximum benefits which can be provided at reirement (main scheme + AVC scheme) is as follows:
1. Member Pension of 2/3rds Final Salary
2.Spouses Pension of 100% of Member Pension
3.Indexation of pensions in retirement at CPI.

If one is a member of a Defined Benefit company scheme which does not have the level fo benefit you refer to in 2 & 3 above - can one fund these increase these benefits from an AVC ?
 
AVC

Thanks to Conan and Trampas for the extra enlightenment.

Now that you have me frightened into thinking that I could overdo the AVCs and advising me to check with the advisors/trustees, there is one piece of information I omitted with might be significant in forming a solution.
My defined benefits scheme is not indexed linked after retirement. If a person aged 65 retires today on a pension of just say 200 euros per week from the main scheme, when he hits 70, 75 or 80 it will still be 200 euros per week. The only increases one will ever receive after 65 will be the state pension side of things. Again briefly I'm mid 40s, chucking in 4.5K euros per annum and now with the AVC fund standing at 30-32K euros. Would it still be outrageous to starting dumping another 1,000 euros per annum in to avail of the tax breaks.
Secondly, my pension scheme that's not indexed after retirement age, is that the norm or are we in an inferior scheme. I reckon the non-indexation is against the trend, most defined benefits schemes would be index linked
 
If your scheme has no pension indexation at all (not even on an ad-hoc basis) then this allows considerable scope for AVCs. Non indexed pensions are not that unusual as this can be an expensive benefit.
On this basis your AVC strategy is well founded. However I cannot say whether your existing or proposed AVC level is overfunding . If you are getting the max (other than for indexation) then I would estimate that you are close to fully funding with the AVC. BUT I stress that you should check it out with the scheme advisor as they can calculate exactly (as they are required to do) what shortfall exists and what level of AVC would likely plug the gap.
 
AVC

Thanks again Conan,

That's a load off my mind. I know where to go now and what to do now.

Over and out
 
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