Backdating AVCs

[Brendan Burgess]

Here is a draft answer for the Indo. Am I on the right track?

I have some questions about backdating AVCs.
1/ Can it be taken from your redundancy payment to reduce your tax
liability ?.
2/ Can it be done from savings & claim back tax that has already been paid
on that money ?.
3/ Can you overpay on your % allowance & claim it as backdated payments ?.
I may soon be in a position where I will want to make full use of
backdating my AVC's.
Thank you
Eddie Lynch.

First of all a general note. You cannot normally backdate AVCs. Say, you are entitled to contribute 20% of your salary and your AVC brings you up to 30%. The 10% excess will be carried forward to the following year. If there are exceptional circumstances such as redundancy, where you will not have an income to carry forward the excess against, you may make an exceptional case to the Revenue to carry it back. You should get this approval before you make the contribution. The tax year end for AVCs is 31 December, so the 31 October deadline for personal pensions has no relevance.

Now to your specific questions:
1) The source of your AVCs doesn't matter, so yes, you can use your redundancy money. When making a contribution within the 20%, it is better to have it deducted from salary, so that you get PRSI relief as well as tax relief on it.

2) Yes it can be taken from savings. If you make an AVC you save money at your marginal tax rate on your income. You are not claiming back tax on your savings as such.


3) The excess will be carried forward automatically, unless you make a special case to the Revenue Commissioners.

 

[Conan]

AVCs

Answer is correct.
The only additional comment is that if one is making a lump sum AVC investment which will not be capable of being spread forward (for example because the member is about to retire), it is possible to have such contribution spread back for tax relief purposes for a period of up to 10 years (where the member has unused reliefs i.e did not contribute to the maximum of 15% of salary in those years). The only stipulations are that:
1) the additional benefits secured by the AVC will not result in Revenue benefit limits being exceeded, and
2) the individual cannot borrow the funds required to make the AVC investment.

Conan

 

[Brendan Burgess]

AVCs

Thanks for that reply Conan

You use the expression "spread forward" and I have seen this used elsewhere. Is this any different from "carried forward"?

In other words, if you have €10k to carry forward, can you use it up in full the following year or do you have to "spread" it over a few years?

By the way, I haven't been on the pensions forum much in recent times, and I have only recently become aware of your excellent posts. It's probably a bit late, but welcome to Askaboutmoney!

Brendan

 

[Conan]

AVCs

Brendan,
Thanks for the kind words. I will try to not let them go to my head.
Regarding the "spread forward", in pension terms this can mean that a lump sum investment, for example, may, for tax relief purposes, be spread over a period of up to 5 years. So whilst the lump sum can be invested now, for tax relief purposes it may be that the tax benefit is spread out into the future (subject to certain conditions).
So "spread forward" is not the same as "carry forward".

 

[Ronan]

Avc's

Conan,
2) the individual cannot borrow the funds required to make the AVC investment.
Does this mean that before I retire at e.g. age 55, I can cash in any investments I have and put the money(up to 30% including superannuation) of salary into an AVC,having paid no AVC's in the past, and get tax relief on this sum of money. If so how long would I have to wait to get the tax relief? Hope this makes sense.

Rgds

Ronan

 

[Brendan Burgess]

Re: Avc's

Conan

When you say that it "may be spread forward", does that mean that it must be spread forward? Can you claim it all the following year if you don't go over your limit? Or must you claim it equally over 5 years?

Brendan

 

[Conan]

AVC Lump Sums

The Revenue are not concerned where the money came from so long as you did not borrow the funds.
Any lump sum invested, in so far as it exceeds that year's limit (say 30%) will be spread forward into future years. So next year relief would be given on another 30% of earnings, until eventually all the investment was relieved. The maximum spread period is 5 years, but it could be relieved over a shorter period depending on the amount invested.
If however after putting in the AVC investment, you retired, then it cannot be spread forward, and at that stage the Revenue will sread back the amount, at the rate applicable each year ( say 15%),until the full amount is relieved. How long this takes before you get a tax rebate will vary, but presumably it should only be a matter of weeks.
The attraction of putting in a lump sum AVC just prior to retirement is enhanced if the AVC fund can subsequently be used to increase the tax-free lump sum available on retirement (for example if the individual has earnings that are not pensioned in the main scheme, such as BIK or bonuses). Such earnings are "pensionable" under Revenue rules and the AVC could be used just to fund the additional tax-free lump sum of 150% of such additional earnings.

Conan

 

[Homer]

Re: AVC Lump Sums

Hi Conan

While I agree with most of what you're saying, I'm not sure that the spread forward rules are exactly as you describe them.

My understanding of Revenue practice has always been that excess member contributions can be carried forward indefinitely and that the maximum five year period for spreading excess contributions applies to contributions paid by the employer.

Has there been a recent change in Revenue practice?

Regards
Homer

 

[Conan]

AVC Lump Sums

Hi Homer,
On mature reflection, yes you are correct. There is no 5 year limit on spreading forward employee contributions. The 5 year rule applies only to Employer lump sums.