Contributing to an AVC - What if I don't retire early

mozzer

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Folks,

So, I'm in my late 40s. I won't have 40 years service until I'm 67.

Although I'm happy enough in my job at the moment, I know that can change so I have just got the ball rolling on setting up an AVC for myself so that I can look at retiring at 62.

The tax relief of this is the main plus in my view and it's always good to have choices.

So my question is, if at 62, I am enjoying work as much as I am now and I don't wish to retire what are my options regarding the money that I've put into the AVC?

Do I stop making contributions as I will hopefully have made up the shortfall?

What's the most tax efficient way of drawing down any excess fund?
 
Strictly speaking, you can only invest AVCs if you anticipated benefits at normal retirement age will be less than the Revenue max. So in terms of estimating a level of AVCs you cannot assume you might retire early. You must calculate your AVC on the basis of retiring at your normal retirement age (is that 62 or 65?).
So strictly speaking you should not have any excess funds.
So if the AVC calculation is done assuming you retire at your normal retirement age (and thus have less than 40 years service), you need to be careful as you approach that age if you intend to continue working, as otherwise you are reducing the shortfall for which AVC funds can be used. So as you get closer to normal retirement age, you need to get your pension advisor to run the number so as to ensure you are not overfunded on AVCs.
 
Conan - I understood from previous postings from mozzer that he is a Class A PRSI public servant. So, excluding his State Pension, he should have good potential for AVCs, even with full service. However, there was an indication from some of his posts that his total pension income in retirement might bring him into the top income tax bracket, thus limiting the potential tax-relief value of AVCs.

@mozzer, I would suggest giving more details of your circumstances - service to date, pension scheme and normal retirement age, current salary for your grade - or the grade that you most reasonably expect to be at come retirement age, etc.
 
Conan and EarlyRiser

Thanks for taking the time to reply.

Just for info. My normal retirement age is 60. At 60 I will have just short of 34 years service. I need 40 years service to get my full pension. I'm earning 85k at the moment. I looked at the possibility of retiring at 62 to align with my partner's retirement age.

I joined the civil service after 1995 so part of my pension will include state pension.

I suppose what I'm trying to do is put a reasonable plan in place for the option of retirement at 62. However I also want to have the option of continuing to work if I would like to when that time comes without too much of a negative impact. Hope that makes sense.
 
Full public service pension is half of final salary. Revenue rules allow pension of up to two-thirds of final salary. Doesn’t this allow scope for AVCs (to bridge gap between public service pension and Revenue max) even if you will have full 40 years service?
 
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Just for info. My normal retirement age is 60. At 60 I will have just short of 34 years service. I need 40 years service to get my full pension. I'm earning 85k at the moment. I looked at the possibility of retiring at 62 to align with my partner's retirement age.

I joined the civil service after 1995 so part of my pension will include state pension.

I suppose what I'm trying to do is put a reasonable plan in place for the option of retirement at 62. However I also want to have the option of continuing to work if I would like to when that time comes without too much of a negative impact. Hope that makes sense.

So, lets assume the most modest increase by way of increment/promotion to bring you to a pensionable salary of €90K (that is leaving inflation aside).

At 62 you will have 36 years service and you can retire normally, without actuarial reduction. In rough terms I calculate your Occ. Pension should be about €29K. If you are not working in insurable employment (and after exhausting any SW entitlement) you should be eligible for a Supplementary Pension until State Pension age of about €11.5K, bringing total pensionable income to about €40.5K. Depending on your full PRSI record you may qualify for a full State Pension at 67/68 but in any event it will not be less than €11.5K.

Your lump sum at 62 should be about €122K. So you could take approx €13K tax free from an AVC a tax-free lump sum top up.

After that top-up you are looking at using any AVC residue to purchase an annuity or to transfer to an ARF. (You might also use it to purchase notional years on the main scheme). In any event, the drawdown of any of this money would be subject to tax at your marginal rate and USC (and any ARF drawdown before 66 incurs PRSI also).
So, although you will get 40% tax relief on any AVC contribution now, you will be paying tax at the same level on drawdown, plus USC and at least some PRSI before 66. Is it worth it? Perhaps, if you get good fund growth in the meantime, but not on the basis of basic tax relief. I wouldn't do it, but some would.
Of course it would certainly be worth it to fund the 13K lump sum top-up, possibly by way of a "last minute AVC".

Apart from the lump sum top-up, an AVC would be a more attractive proposition tax-wise if you were thinking about taking CNER at some stage before 60.
 
Thanks very much Early Riser.

I was told an ARF or annuity were my options but just wanted to hear other views. You've answered my question.

I think I'll just continue as I have planned and see how I'm feeling about things on a yearly basis.

The good thing about this course of action is that gives me a choice about early retirement. So if I want to go I can. It also allows me the option of taking some extended breaks over the next few years while I'm young enough to enjoy them.
 
Full public service pension is half of final salary. Revenue rules allow pension of up to two-thirds of final salary. Doesn’t this allow scope for AVCs (to bridge gap between public service pension and Revenue max) even if you will have full 40 years service?

Apart from the half of final salary, the public service pension also provides for lump sum of 120/80 of final salary and a survivor's pension. So this eats into the 2/3 of final salary allowed by Revenue.

However, if you are a public servant on a Class A PRSI there is still good scope for AVCs. Such people are on a coordinated pension - the half of final salary only applies if you include the State Pension. In effect, a full Occupational Pension amounts to 0.5 of final salary minus the State Pension. The Revenue limits do not include the State Pension, thus presenting a funding opportunity. But you would still need to consider the vaue of AVCs if you are going to be paying top rate tax on any drawdown.

The opportunity for public servants on pre-1995 Class B/D PRSI schemes are more limited unless they are short of full service. I understand there still may be some opportunities, eg, for someone who has more than 40 years service and is retiring later than normal retirement age (60). I am not really au fait with the details but I believe it may be possible to fund an additional tax free lump sum amount of up to 15/80 (for someone who has 45 years service at 65). But I could not advise on this as I am not sure of details. Here is something from Revenue - See 8.5 :https://www.revenue.ie/en/tax-professionals/tdm/pensions/chapter-08.pdf
Also, there may be some consideration on how the survivor's pension is capitalised in relation to the Revenue limits. Again advise from someone more knowledgeable about this would be required.
 
I think I'll just continue as I have planned and see how I'm feeling about things on a yearly basis.

I note your wife will also be retiring and will, presumably have a pension. My assumptions on the top tax rate on any additional pension for you was based on a single person. You would also have to factor in your joint pension income and whether your wife has any unused credit she can transfer to you. I think the current cut-off for a married couple is €70,600 but no more than €44,300 for either one.
 
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