Maximise AVCs or not ?

H

HaloSun

Guest
Hi All

Advice on the following situation would be appreciated ! Thx :)

Have 2 yrs service in a Company that offers a DB pension. I could potentially have 37 yrs service if I stay until I'm 65 but it is likely I won't be with the company in 3-5 years time. I'm 30 years old.

I have a PRSA AVC which I pay 9.5% of Net pay into... for the tax and PRSI relief.

Will be debt-free in Dec 2009 and so have been thinking about maximising my AVC contributions from Jan 2010 onwards - to maximise tax and PRSI relief.

I earn the average industial wage. Got a Pension Statement recently which said that if I stay until I'm 65, I will get a pension of approx 5000 per year. Which took me by surprise. I mean that is peanuts. I know it is based on a Final Salay of 30000 approx... and hopefully my salary would theoretically be higher (promotions etc) by the time I retire...

Anyways... what I need advice on is the following possible scenario:

I leave the company in 2 yrs time with 4 yrs service. My AVC pot at that point is 15000. There will be 33 yrs until I'm 65 so the AVC may have grown a great deal over those years.

What is the likelihood that at 65, the AVC fund will be bigger that the Revenue-imposed limit based on 4 yrs service so I won't get any pension from the DB scheme at all ?

If I have only 4 yrs service when I'm 65, why doesn't the excess AVC money (if there is an excess) be used to fund a pension up to 40 years service ? I mean why penalise people for saving for retirement ????

I don't obviously want to do anything to lessen my Employer's pension commitment to me in retirement...

But also I am aware that it is very possible that the DB scheme may well be gone bust in the intervening 33 years - e.g. Waterford Crystal... and the AVC scheme would at least provide me an income regardless of the Main Scheme....

Any thoughts ?

Thanks in advance.....
 
Hi there,

I think that maybe you should be focusing on generating a deposit for a house and creating a bit of savings. I of course assume you do not currently own a house?

You are right to be concerned about a pension but you have more pressing issues at present and you are actually contributing to a pension and AVC's as well. You seem to be doing fine as you are from a pension perspective.
 
Also remember that on top of the current 5K per year DB pension entitlement, you are entitled to the state pension of c.12.5K per year. Your scheme is linked to the state pension. And as you say yourself, this will rise as your salary rises.
 
Thx goingforgold

I'm not a homeowner but, as a single man, I've no real desire to be either. In 2/3 yrs time, I could well be working abroad or in another part of Ireland - I don't want a mortgage around my neck at this point in time...

I am intending to save for future accommodation alongside my AVC payments but I think you're right and I might leave the AVCs at the level they are at and put more money into savings... until they become substantial...

Yes my scheme is linked to the State pension. But in 35 yrs time, given the economic crisis' that come and go and fact that we are living longer.... will there even be a State pension for those who already have their own pension (will it be means tested) or will it be severely reduced compared to 2009 levels..

For example, a lot of Americans my age are not counting on there being Social Security of the level there is now when they retire.... due to the mess that country is in.... is Ireland any better ?
 
What is the likelihood that at 65, the AVC fund will be bigger that the Revenue-imposed limit based on 4 yrs service so I won't get any pension from the DB scheme at all ?
Click to expand...

I would be very surprised if the current pensions legislation applied in 35 years' time. So I really would not be worrying too much about this.

Given that you are so unsure about your short-term plans, you should not be contributing to a pension at all. You should save outside a pension scheme so that you will have access to your cash.

As GoingforGold suggests, you may want to buy a house. The fact that you don't want to buy one now, doesn't matter. You may well want to buy one in 5 years' time and have no deposit, because you have a pension scheme.

You may not even be in this country and trying to sort out a pension which arose in Ireland but is now payable to you in some other country could be tricky.

The Commission on Taxation has recommended taxing "tax-free" lump sums. They may well make the tax treatment of pensions less favourable in years to come.

Keep your funds accessible.

Brendan
 
Thx Brendan

You are right. I should build up savings outside my AVCs that could be used for a multitude of things - deposit being one.... to save me from getting back into debt...

I think I will keep the AVCs at their present level and simply increase my savings using the "new" regular income I will have when I'm not paying my loan back.

The reasons I want to continue the AVCs are:


  • I like having all bases covered.
  • The good Income Tax/PRSI relief I can claim annually.
  • Tax-free growth
  • The sense that I can't touch this money until I retire... so it is "safe" so to speak from any stupid financial moves I make in the future...
  • Time... Paying these AVCs now gives them 35 years to grow... compared to 25 if I don't start making them until I'm 40....
But I have taken your point on board... and will save much more monthly in an accessible account than I save in AVCs....

Thanks again
 
Brendan said:
Keep your funds accessible.
Click to expand...

The fact that this..

Pre-retirement access to funds. We believe that there should be some form of pre-retirement access in the case of, for example, the purchase of a house as a principal private residence or serious illness. All matching Exchequer contributions related to the amount drawn down would be repayable in the event of such access. The potential for exceptional access to funds may increase the attractiveness of the scheme.
Click to expand...


..is even mentioned in Commission on Taxation Report in relation to their 'new' proposal on a Retirement Savings Scheme may also imply that they are thinking along the lines of providing greater accessability. ​
 
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