Teacher AVC's - is there such a thing as overpaying same?

[1eyeonthefuture]

Other half is 43, having started teaching at 19. (therefore on the "old pension scheme".)

Took 1 year abroad teaching.
Apart from that has had constant service. Began paying into AVC's month 1 of her employment.

Total contribution @ 63K
Annual contributions @ 6,800
Current value @ 80,600
Projected value at age 65 @ 275k

Notional idea of early retirement at 55 at which point expects to be vice principal.

At this point, growth rate at current avg rate would give an AVC value of €187K

Another teacher in her school mentioned that there is a point at which you are paying too much into AVC's and she has probably passed that point.

Is this true? (as I was always of the thought that the max allowable contribution would pre empt such a situation arising)

What are others opinions given above and hopes for early retirement?
Are there any others in the same position and if so what are they doing with Avc levels etc?

 

[Steven Barrett]

You are entitled to a maximum pension of 2/3 final salary. There are computation tables used to calculate the value of pension benefits (it used to be just multiply the value of the pension by 20). If taking early retirement, this is actuarially discounted to take account of retiring early.

It is very possible that the value of the AVCs takes the overall value of the pension over the revenue maximums.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)

 

[1eyeonthefuture]

Thanks Stephen, appreciate the reply.

 

[Early Riser]

Other half is 43, having started teaching at 19. (therefore on the "old pension scheme".)

By *old pension scheme" do you mean she pays Class D PRSI ("modified rate")? If she started teaching 24 years ago she is more likely to be at the Class A PRSI rate (post-1995 scheme). There is more scope for AVCs in the latter, as the occupational pension benefits are coordinated with Social Welfare/State Pension benefits. It is fairly difficult to overfund in the latter case.

Apart from the risk of overfunding, you might also want to consider the taxation benefits. Although there are different views on this, many people would question whether it is worth paying into an AVC to get taxation relief at the top rate if they are likely to be paying the same top rate of pension at drawdown.

 

[1eyeonthefuture]

Hi, yes excuse me, she is on post-1995 scheme.
Thanks

 

[Conan]

Two points:
1. Under Revenue Pension rules it is not permissible to fund AVCs purely on the basis that you intend/might retire early. The funding limit calculation must be done on the basis that you are retiring at normal pension age and there must then be a gap between the anticipated benefits and the Revenue maximum benefits.

2. If she is in the post-1995 “integrated scheme” (as Early Riser suggests) then there will be a gap, in that she can fund for the Social Welfare Pension offset. However there is still a limit to how much of an AVC fund she can build up. In capital terms and taking the current SW Pension of c€13,000 pa, the max AVC fund to bridge that offset might be c€300,000 by normal retirement age. Obviously this might increase somewhat as the SW Pension increases.

As Early Riser alludes to, it is questionable whether is makes sense to fund additional Pension income through AVCs if the resulting additional income is likely to be taxed at the marginal rate. So although you may get 40% tax relief on the contributions, if you are likely to pay 40% PAYE + 4%/5% USC, it may not be the most tax efficient strategy. AVCs make perfect sense if the fund can be used to maximise the retirement lump sum. But since she will have full service by age 65, there is unlikely to be any scope (or very little scope) to take some of the AVC fund as an additional tax-free lump sum. It’s likely that all the fund would have to be converted into taxable additional pension income.

 

[Early Riser]

Hi, yes excuse me, she is on post-1995 scheme.

Then it is unlikely that overfunding will be an issue. However, she may still want to consider whether or not there is a tax advantage, based on her projected retirement income. That includes a possible Supplementary Pension from 60 if not working- or employment income if she envisages some other working role.

Take a PS retiring with 35 years service on a salary of €90k. If they were a pre-95 (Class D) the occupational pension (no adjustment for early retirement) would be 90K * 35/80 = €37,375. However, if on Class A the occupational pension would be €37,375 - (35/40*State Pension) = €28,000. Thus there is far more scope for AVC funding.

Notional idea of early retirement at 55 at which point expects to be vice principal.

I believe teachers with 35 years service can retire normally at 55 (ie, no actuarial reduction/CNER). Not sure about this.

1. Under Revenue Pension rules it is not permissible to fund AVCs purely on the basis that you intend/might retire early. The funding limit calculation must be done on the basis that you are retiring at normal pension age and there must then be a gap between the anticipated benefits and the Revenue maximum benefits.

I don't think this is generally likely to be an issue on a PS Class A PRSI scheme. Also, at least some AVC providers seem to ignore this provision. It is only likely to present a problem in the event of excess funding at time of retirement.

 

[Protocol]

Yes, teachers can retire at 55, but retiring at 55 is subject to several restrictions.

Teachers appointed before 1st April 2004 who have at least 35 years of service and want to retire from age 55 may do so with no actuarial reduction in their retirement benefits i.e. if you have 35 years of service, you will be paid for 35 years of service. Credit for pre-service training of either 1 or 2 years is given in order to help teachers to reach the 35-year threshold for retirement. However, such credits do not count as pensionable service i.e. a teacher eligible for the maximum credit of 2 years would be able to retire after 33 years of service (having reached age 55)