Revenue limits for final salary

S

Summer

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"Just remember that the max pension is 40/60 or 2/3 of final salary (without deduction of state pension) per P60 and you can get tax relief on any contributions you make. "

This statement was in a previous post. If I am making AVC contributions does this affect my pension if I have made them in the year in which I retire. They are deducted from my salary at source. If so:
Is it only my lump sum? or will it affect my pension as well.

Thanks
Summer
 
If you are making AVC contributions then any additional contributions you make will increase your pension subject to a max of 2/3 of final salary. (I think revenue use P60 in the year prior to retiring.)

In relation to the lump sum you normally commute part of your pension in order to take a lump sum payment (for every 12 euro taken as a lump sum (this differs depending on the scheme) means a reduction of 1 euro in your annual pension). The max amount available for pension and lump sum is 2/3 of final salary.
 
The AVC will not reduce the salary - the P60 Salary will not be affected by making AVCs.

The best move is to use the AVC to provide the tax-free lump-sum if you are in a company scheme.

The commutation rate mentioned in previous post of 12:1 is very unfavourable, many companies use 9:1 and this is even more unfavourable for people taking the lump-sum.
 
The commutation rate mentioned in previous post of 12:1 is very unfavourable, many companies use 9:1 and this is even more unfavourable for people taking the lump-sum.
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The lump sum is tax free and available immediately. You will probably pay tax on your pension anyway especially if you are at 2/3 of final salary. Horses for courses really.

I would love to know where these figures come from?
 
Where what figure comes from?
Maybe you mean commutation at 12:1.

Commutation at 12:1 is unfavourable because, imagine the case of someone with a pension of €10,000 and an option to take a tax free lump sum of €120,000.
So imagine this person takes the tax-free lump-sum, they will get €120,000 but the pension will be reduced by (€120,000/12) so they will have a €0 pension.
Now if that same person goes to the market to try and buy a pension of €10,000 (which would be pretty much tax-free anyway because of the tax-free allowance for a pensioner) it will cost them about €200,000 (assuming person married).
So, they would lose €80,000.
 
So imagine this person takes the tax-free lump-sum, they will get €120,000 but the pension will be reduced by (€120,000/12) so they will have a €0 pension.
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To take a tax free lump sum of 120K the person would have to be on a final salary of 80K (80K*1.5 = 120K)

Assuming max pension of 2/3 that person would be on a pension of 53.3K
Commuting the pension at 12:1 would reduce the pension to 43.3K
There will always be a pension after commuting a lump sum (my understanding)

My understanding is that the two situations are related you can't take one in isolation so the if you has less than the max pension allowed then the max lump sum is also reduced - some type of acturial reduction (I think)
 
You are talking about a Defined Benefit Scheme.

In this scheme somebody may be able to take a lump-sum of €120k and only have done twenty years of service so they would not be able to get the max pension you mentioned at all.

There does not have to be a pension after commutation.

No there is no such actuarial reduction - it depends on scheme rules for the pension but the max lump-sum is determined by a revenue rule.

My point stands - best fund your lump-sum through an AVC because the commutation factor (9:1 for most DB schemes) is not favourable to the member.
 
My understanding is that in calculating the lump sum the commutation factor comes into play regardless of how it is funded (from pension or by AVC). The pension and AVC are controlled by the scheme
 
Not in a Defined Benefit Pension Scheme - usually AVCs are on a Defined Contribution basis so there is no commutation taking place, a person can use their AVC Fund to provide the tax-free cash and it would make sense to.
 
Thank you for all your replies.
Could you explain please what an actuarial reduction is. I do not have full service and would be retiring early. Is this an industry standard or is it a rule of a scheme. The rate being quoted is 5% for every year before 65.

Thanks

Summer
 
It is a rule of a scheme - not an industry standard.

It applies to the pension for every year by which you retire early.

For example, if your pension from age 65 based on service to age 60 is €10,000 and you retire at 60 then a 5% reduction per year early means a 25% reduction for retiring five years early.

So the pension from age 60 would be €7,500.

The reason is that your life expectancy at 60 is longer than at 65, and it is also paid sooner (from age 60) than if you waited until 65.
 
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