Maximising Tax Relief on Pension Contributions

Hi,

Just wondering if my thinking below is too good to be true?

I'm not currently maximising my pension contributions due to needing the funds for daily life and I'm wondering if there's a legit way of doing that. I'm currently contributing 13% to my pension but 30% contributions would be allowable by Revenue if I had it to spare.

I have a DC scheme with my current employer and 4 other PRSA/PRBs from previous employers. I'll be 54 this year and estimate I could have a total pot of €800k by the time I'm 62 depending on performances.

However if I were to 'cash in' my 4 PRSA/PRBs in a staggered way over the next 5 year and use the lump sums to supplement my daily living expenses then I believe that I could maximise my current pension contributions from my current employment up to the Revenue limits. I estimate that this would allow me to reach the €800k approx. 2 years sooner. I know that I'm limited on the total tax free lump sum element but is it legit and sensible to do the above?

I'd be effectively using my currently unused tax relief to fast track my retirement/maximise my pot?

Could you give a rough idea of the current value of the 4 PRSA/PRBs? Some of the big brains and actuaries on here could probably give you an answer off the top of their heads, but I still enjoy sitting down with a quill and looking at the actual figures in a worked example.

Its more the principle that I was concerned with i.e. is it legal, is it reasonable but numbers below for context.

4 PRSA/PRB 'pots' - €106K, €87K, €52K, €20K = €265K. The idea was to cash in the pots in decreasing order
Current employment DC 'pot' = €228k

It's certainly legal. I'm assuming that you have left all the employments where the four pots were accumulated.

It makes sense as long as you make sure to "gross up" the amounts you withdraw as lump sums and are a 40% taxpayer. It makes even more sense if you will be a 20% taxpayer in retirement.

Current total pot = €493,000

Retire €265,000. Withdraw 25% or €66,250 in lump sums, tax-free.

Invest an additional €110,000 in AVCs. Net cost to you after 40% tax relief = €66,000. You spend your lump sums to replace this. I'm assuming that you spread the whole exercise over a period of years to stay within your 30% limit for tax relief (which will be 35% when you hit 55).

End result: you then have €199,000 (the other 75%) in an ARF + €228,000 in the DC scheme + €110,000 in AVCs = €537,000. The gain you make is the additional €44,000 in tax relief on the additional €110,000 put in.

Downsides ... from the year in which you turn 61 you must start making a withdrawal of 4% per year of the ARF. If you haven't retired by then, you'll be hit for high-rate tax and levies on this as it will be additional income over and above your salary.

When you retire the DC scheme, your maximum tax-free lump sum will be around €134,000 and anything above that will be taxed at 20%.

Thanks Dave,

Yes - I have left all the employments for the four pots in question and I'd spread the whole exercise over a period of years to stay within the relevant tax relief bands. I am a 40% taxpayer, would "gross up" the amounts withdrawn and expect to be a 20% taxpayer in retirement.

I see clearer now that I'm 'losing out' on the €66k lump sum in one sense but not really as its just arriving early, and its equivalent is invested tax-free in the DC scheme so I'm ultimately 'gaining' the €44k in tax relief plus investment gains which hopefully allows me to hit my target pot earlier.

The 4% withdrawal from 61 may not be an issue if I can afford to retire by then but overall maxing the contributions seems like a worthwhile option even if I don't retire then as presumably I'll still be contributing.

One small point , you mention that some of pensions are PRSA’s. My understanding is that if these your employer sponsored PRSA’s then you need to be unemployed to access prior to age 60

Realcork said:

One small point , you mention that some of pensions are PRSA’s. My understanding is that if these your employer sponsored PRSA’s then you need to be unemployed to access prior to age 60

Click to expand...

Once you're no longer in the employment where you contributed to the PRSA, you can retire them from age 50 onwards. You'll be asked for your P45 or electronic equivalent.