PRSA or AVC in Public Service

I have just joined the public service on a salary of c. 30,000. I am 50 and intend to be in the public service for the next 12 to 15 years.
I have significant cash savings sitting in the bank.
I had an idea that I could take out an AVC or PRSA and contribute say 25k into it from my salary per year. I can make up the shortfall in my net salary from the cash savings I have in the bank (which could cover such an exercise for 10 yrs +).
Does the public service allow PRSA's and/or AVC's and does this sound like a good idea, to save the tax on the pension savings and finally, is there an advantage of one over the other (AVC versus PRSA)?

You can certainly contribute AVCs, but from a tax relief perspective you are limited to 30% of Salary between 50 and 54, 35% of Salary between 55 and 59, and 40% of Salary after age 60.
You can contribute to an associated AVC Scheme or a stand-alone PRSA AVC. Other than looking at the charges, there is little difference between either route.

Thanks Conan,
Even though my tax break would be at the lower level of 20% because of the low salary, it still seems like a good idea, I'm struggling to see any down side, although I am no expert when it comes to tax.

Even with only 20% relief (plus tax free roll-up within the fund), there is still some merit in your proposal. You also need to consider the tax position in retirement. Obviously, you will be entitled to a certain amount of tax-free lump sum, but the rest will be in the form of a pension income. Depending on your overall income in retirement (Public Service pension + State Pension -presumably) you will perhaps pay some income tax, but maybe the majority of your income may be below the tax threshold (depending on overall income, marital status etc).

I'd agree strongly with Conan's point above about considering your likely tax position in retirement. You joined the public service at 50. It's possible that you accumulated other assets prior to this which will generate an Income Tax liability for you in retirement, e.g. a pension scheme in a previous job, rental income from property, dividend income from shares etc. Or you may have a spouse with substantial pension income or other taxable income.

If there is a likelihood that you might be paying tax at 40% in retirement, then that's an argument against making pension contributions now and receiving 20% tax relief.

Regards,

Liam
www.FergA.com

My situation is I am married:
My wife has a pension fund of 70k, no longer paying into it.
I have 3 pension funds totalling 440k, no longer paying into them.
Separately, we have cash savings of circa 420k (currently in 10 yr State Savings Scheme) This came from a business sale and all taxes are paid on it.
We have no shareholdings or proceedings from shareholdings or rental properties etc.
I have just joined the public service and based on projected salary (current salary 31k), I think my public service pension will be circa 4k per year with a lump of circa 15k, provided I stay in until I am about 65 (I'm 51 now).
My wife works a part time job and earns circa 15k per year.
We have no mortgage or other debt.

Based on the above, does it look like maximising a PRSA or AVC from my public service salary from now until I retire makes tax sense or am I going to get a sting in terms of tax when I retire that makes the exercise of a PRSA/AVC a waste of effort?
My plan as outlined above would be to maximise the deduction from my salary to go into an AVC/PRSA and supplement our household income if required from our cash savings which have already been taxed.

I think the AVC or AVC PRSA makes sense. At the moment, a married couple where at least one spouse is 65 or over can have up to €36,000 annual income and remain exempt from Income Tax. Depending on your State Pensions, you could be under that limit. Or you could engineer it so that you delay drawing down some of your private pensions with the specific aim of staying below the Income Tax exemption limit for a while.

Even if you're over the Exemption Limit, only part of your pension income will be taxable at 20% after Tax Credits etc. So in my opinion, your plan to make AVCs or start an AVC PRSA makes a lot of sense.

I'm assuming that tax rates when you're 65 are the same as they are now, but we can't know that in advance.

If you haven't already, no harm in checking yours and your wife's PRSI record to see if you're on target to receive a State Pension each.

Thanks LDF.
I registered on mywelfare.ie and I can access a Contribuition Statement which shows I have see that 'Reckonable Contributions' between 1991 and this year of 52 per year with the exception of 1 year that says 'paid' 38 and 'credited' 14.
Is this the PRSI record you mentioned and if so, are there a minimum number of years needed to get the State Pension?

As an aside, I'm a little older than you and I still can't get used to the idea that 1991 is 31 years ago.

Once you have a total of 2,080 PRSI contributions by the time you reach the State pension age, you should get the full rate. It looks like you will, as you've another 14 or 15 years to go. (There are other, more complicated methods of working out your eligibility but they may be discontinued by the time you get there. That's of academic interest only as long as you qualify by at least one method which you do.)

It would be worth doing a similar exercise in relation to your wife, to see if she will have an entitlement in her own right.

I hear you on the 1991
My wife checked her contributions and she has circa 1,300 so it is unlikely she will make 2,080 as she works part time now as it is.
If you fall short of 2,080, do you get a pro-rata contributory state pension or none at all or do you get the 'non contributory' state pension instead?
Just on this point, is either the contributory state pension or non contributory state pension means tested or is it a case that you reach retirement age and automatically get which ever one you are entitled to, regardless of means?

Once a worker earns 38 per week, they are credited with a SI contribution.

20 hours...30 hours....40 hours, that is not relevant.

There are two parallel social welfare systems.

Social insurance
Based on SI conts
Not means-tested, look for the word Benefit
State Pension - contributory
JS benefit
IP
Carers benefit
maternity benefit



Social Assistance
Means-tested, hint is the word allowance
Non-con pension
JS Allowance
DA
Carers allowance
OPFP

Protocol said:

Once a worker earns 38 per week, they are credited with a SI contribution.

20 hours...30 hours....40 hours, that is not relevant.

Click to expand...

Once a worker earns 38 euro per week they get a "paid contribution" at class A. They do not receive a Prsi credit.

Using the term SI is confusing as it could be mistaken for an S1 class Prsi contribution.

Yes, I mean that they receive a regular, normal PRSI contribution, once they earn 38 per week.

Class A employees​

If you are earning €352 or less per week (before tax is deducted), you will not pay any social insurance. This does not mean that you are not getting a contribution. You are still covered by Class A social insurance. Your employer is paying social insurance on your behalf.

See page 6, Class A, subclass AO.

The 38 is mentioned.

Thank you all, and if you do not make the required number of contributions, lets say you achieve 1,700 instead of 2,080, do you get no contributory pension or is it pro-rata'd?

If you have 1700 contributions, that’s equivalent to c33 years. So you would qualify for a pension of 33/40ths under the Total Contribution Approach (which it seems will become the only calculation model to be used in a few years time). The Non Contributory Pension is means tested and is a lower rate payment.

Thanks Conan, that is very useful information.
With regard to the means testing, do they test on an individual basis or both spouses (household).
My wife only has a private pension of 70k, however I have a private pension of circa 440k and cash savings of circa 400k. If they means test my wife based on 'household' savings and investments instead of on an individual basis, it looks like my wife may suffer under a means test and not qualify for a non contributory pension. I did a search to see what the limits were for this means test and the Citozens Advice website seems to indicate the means test is per the household.

If you are getting a State Pension (even a reduced one) your wife could apply for the additional payment for a Qualified Adult Dependent . This payment is means tested on the means of the Adult Dependent .