Teacher AVC

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imalwayshappy

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A teacher with 40 years service aged 61 can retire on a full pension? If the salary at retirement is 70k the max lump sum they can receive is 105k.

The teacher is currently 40 years old and has an AVC with a balance of 40k. Projections at age 61 (on retirement) would be 150k (example only).

Questions 1: Can the teacher use 95k from the AVC to bring them up to the revenue limit of 200k tax free? or are there hidden revenue rules around public service pension caps.

Question 2: On the remaining 55k can this be transferred to an ARF. I just want to make sure that there is no negative consequences for the teacher to keep paying into an AVC for the remainder of their career.

Thanks for reading!
 
You cannot use an AVC to top up to €200,000. The limit is 1.5 pensionable salary.

As to your scope for AVCs to transfer to an ARF, it depends on whether you pay modified rate PRSI or full rate (Class A). If you pay full rate PRSI you have loads of scope. If it is Class D/B the scope is very limited as you will have full service. There may be some scope for a fund to maximise the survivors element of the pension (I am not sure about this). Otherwise the AVC would be of value if you are likely to consider cost neutral early retirement.
 
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The €200,000 limit is just a tax-free threshold for retirement lump sums. It applies to both public sector and private sector pension schemes equally.

In a public sector scheme, the maximum lump sum is 1.5 x salary. No more. If it so happens that your salary is greater than €133,333 so that 1.5 x salary is greater than €200,000, then the excess lump sum over €200,000 will be taxed at 20%.
 
Early Riser said:
As to your scope for AVCs to transfer to an ARF, it depends on whether you pay modified rate PRSI or full rate (Class A). If you pay full rate PRSI you have loads of scope. If it is Class D/B the scope is very limited as you will have full service. There may be some scope for a fund to maximise the survivors element of the pension (I am not sure about this). Otherwise the AVC would be of value if you are likely to consider cost neutral early retirement.
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There is plenty of scope for making a large amount of AVCs for a person on class B or D Prsi. The AVCs can be made to make up for the shortfall in surviving spouses pension from the 50% of the workers pension to the 100% revenue limit. Any AVCs at retirement can then be used to purchase an ARF or Annuity.
 
So what happens to the €150k in the AVC in this case ? Assuming OP has forty years service at sixty
Does the entirety of it go into an ARF and it gets drawn down as needed. All taxed. Any chance that it could be taken out earlier seeing as it is going to be taxed anyway . Surely there is no point in making any further contributions to the AVC ?
 
Thanks all for the advice. lawoman touched on it on the above post re the AVC also but is it worth while continuing to make AVC's for the next 20 years? The only benefit I see here is perhaps that the funds grow tax free but at the end everything gets taxed so there is not much point in continuing the AVC's unless i am missing something...
 
There is usually scope to get some extra tax free lump sum on top of the maximum allowed by the pension scheme. For non pensionable allowances or overtime.
If they are paying tax at 40% on earnings and will be paying tax at 20% after retirement then there is a good advantage in continuing to make AVCs.
 
@imalwayshappy
There is one possible way you could go beyond the tax-free lump sum limit of 120/80. That is on the basis that you're normal retirement age is 60 and you will have full 40 years service at 61. If you were to continue in the post for, say, another 4 years you could take 12/80 tax free from an AVC. This is only for service that is both beyond the normal retirement age for the scheme and beyond full pensionable service. The absolute maximum allowed is 15/80 (5 years).
 
As a 53 yr old teacher who is looking to retire age 57 or 58 I have noticed that a lot of my fellow teachers in our 50's would like to retire early if possible. Teaching is very demanding and gets harder as you get older imo.


The current top of the scale salary is @ 78k so if you have 40 years done then you will have a pension of 39k. And if you have a post of responsibility this will be over 40k where you are hitting the high tax rate. The AVC money will then be taxed at the 40% rate so no big incentive there so long as the tax system stays the same or similar.


Continuing with some AVC contributions would allow for the option of getting out earlier. Otherwise I don't see any point in saving into a fund which is going to be taxed at 40% on exit and there's also risk of losing money as the funds are played in stocks and shares. And a no risk fund would probably not keep up with inflation.
 
Are you married ?
Does your wife have a large pension ?
Would your total pensions reach 80000 euro ?
You might have some 20% tax band available.
 
sidzer said:
As a 53 yr old teacher who is looking to retire age 57 or 58 I have noticed that a lot of my fellow teachers in our 50's would like to retire early if possible. Teaching is very demanding and gets harder as you get older imo.


The current top of the scale salary is @ 78k so if you have 40 years done then you will have a pension of 39k. And if you have a post of responsibility this will be over 40k where you are hitting the high tax rate. The AVC money will then be taxed at the 40% rate so no big incentive there so long as the tax system stays the same or similar.


Continuing with some AVC contributions would allow for the option of getting out earlier. Otherwise I don't see any point in saving into a fund which is going to be taxed at 40% on exit and there's also risk of losing money as the funds are played in stocks and shares. And a no risk fund would probably not keep up with inflation.
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If you put it into a pension, you're paying 40% later but it's allowed to grow tax free. If you take it as income now, you're still paying 40% but no option to allow it grow tax free. Am I missing something? Obviously that is simplified.
 
Whilst investing AVCs to augment the Retirement Lump Sum (where you are not getting the Revenue maximum from your Occupational Scheme - perhaps due to short service) is clearly tax effective, doing so in order to augment your ultimate pension income is less clear.
1. if you get 40% tax relief on the AVC but expect to be only liable for 20% tax (lower rate) on the ultimate income, then it makes sense (particularly when you add in the tax free accumulation during the investment period).
2. If however, you will be liable for the top rate of Income Tax +USC on your ultimate pension income then it is less clear that it’s such a great idea (unless perhaps you have a long investment period of tax free growth).
2. If you are close to retirement when making the AVCs and expect to paying tax at the top rate (plus USC), then it’s not a great idea.
Admittedly, if you invest the AVC fund into an ARF in retirement, you have some flexibility in terms of how much income you draw down each year, subject to the 4%/5% minimum drawdown. So you might be able to manage the numbers to remain within the lower tax rate (depending on whatever other income you have).
But the fact that you might get 40% relief on the contributions going in, doesn’t automatically mean that making AVCs is a tax sensible investment.
 
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