Teaching Pension: AVCs' Limits & Tax Efficiency

Cormac

Registered User
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Hi,
I’m looking into my pension arrangements at the moment and have quite a few questions which I would like to get clarity on.
My situation is

Teacher, 41, pre-2004 entrant (an ‘old entrant’).

Began teaching at age 23, with two career breaks since (career breaks are not a break-in-service, so I remain on the ‘old’ pension scheme)

Purchased AVCs from/through Cornmarket from 2004-2008; not sure why I stopped, but I do recall there was somewhat of an anti-Cornmarket feeling at the time, perhaps I was influenced by this.

I began purchasing Notional Service from the Dept. of Education about 5 years ago. This will make up my shortfall in years, bringing me up to 35 years service.

Unmarried, no children and no plans to change this situation.


Some of my questions are;

1) I am 41, so I can contribute 25% of my gross salary to a pension and get tax relief on it. This tax relief will be at my marginal rate, i.e. 40%. This is, in general, very tax-efficient so I would like to do it. Is all this correct?

2) At the moment, I am contributing

‘Dept. Of Education’ Pension 6%
Spouse and Child Pension 1.5%
Notional % Contribution, I am not sure of (For ease of use, let’s say 2.5%)

So, 6% + 1.5% + 2.5% = 10%.

Therefore, am I ‘wasting’ 15% of my tax-relief allowance? (Allowable tax-relief 25% - Claimed tax-relief 10% = 15%)

If I am ‘wasting’ it (perhaps ‘not utilising it to its maximum’ would be a better phrase), is there anything I could/possibly should be doing in order to better make us of the tax-relief?

3) With this in mind, can I resume my Cornmarket AVC payments? Or transfer that AVC money to another AVC PRSA with another Revenue approved provider of my own choice? Or just allow the Cornmarket AVC to ‘sit’ and open another AVC PRSA with another Revenue approved provider?

4) If I resumed my Cornmarket AVC payments, can I over-contribute to my pension (get tax-relief now, but suffer on drawdown/in retirement)? Is there a tipping-point at which I should not put money into an AVC?

5) My ideal would be; Continue purchasing Notional Service . Max out my tax-relief allowance (25% of gross) through an AVC PRSA of my own choice. Retire and have my ‘Dept’ pension, a big lump sum (with the AVCs having built it). If the lump sum was over 200k, could I put the excess in an ARF and would this shield it from marginal rate/punitive tax? Could I get the AVC money as a drip feed on top of my reglular Dept. pension? I am inclined to think this must not be possible, Revenue are hardly that generous ...

6) I never though about it until now, but does holding the Cornmarket AVC (currently c. 8K) and purchasing notional at the same time put me in breach of anything?

7) I have been doing some reading on investment it would seem that a pension 'wrapper' is a tax efficient way to invest. If I could, in my situation, make use of any such 'wrapper', it would be great. But not sure if I have the scope to do this, at least in a tax-efficient way.

I have a few more questions, but I’ll try to get clear on the above first.

Any help/insights/experiences would be appreciated
 
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A lot of questions there - too many for me. But just a few points.

The maximum lump sum you can take is 1.5 times your pensionable salary - that is from all sources combined - Occ. Pension, Cornmarket and/or PRSA AVC. So if your pensionable salary was €80k the max tax free lump sum would be €120k (provided you have at least 20 years of service).

In my opinion it makes little sense to be over-funding to an AVC now if you are going to be hit with tax at the marginal rate on future ARF withdrawals. Its great to max up the tax free lump sum and, again in my opinion, probably sensible to get tax relief now at the marginal rate if your future withdrawals are likely to be at 20% (plus USC and possibly PRSI depending on age at drawdown). I think it makes no sense beyond this.

There is no technical reason preventing you from purchasing notional service while also having an AVC.

Are you purchasing notional years with reference to age 60 or 65 ? What age do you propose to retire at ? You say you are purchasing to bring your service up to 35 years. Maximum pension is based on 40 years service. If you intend to retire at 60 then you can approximately estimate how much it may be worthwhile contributing to pension now to have maximum pension benefits then. I suggest thinking about how to tax efficiently fund maximum pension benefits at your intended retirement age, rather than focussing on maxing out all available tax relief in the interim (in my opinion!).

Just one more note. You seem quite certain about not needing the Spouse and Children pension benefit. As this is included in your main scheme (at a cost of 1.5% pensionable remuneration) it will also be include in any notional years you are purchasing. You can't opt out of it - a part of what you are paying towards notional years goes towards the Spouse and Children element. AVCs are more flexible in this regard. Of course, circumstances can change too!
 
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Early Riser, thanks for your reply, very helpful, I appreciate you taking the time.
Could I possibly pick your brain (or that of others') on a few things?

The maximum lump sum you can take is 1.5 times your pensionable salary - that is from all sources combined - Occ. Pension, Cornmarket and/or PRSA AVC. So if your pensionable salary was €80k the max tax free lump sum would be €120k (provided you have at least 20 years of service).

“The amount of cash you can get from an occupational pension scheme at normal retirement age is broadly 1.5 times your Final Remuneration” (from Pensions Authority website).
“The first €200,000 of pension lump sums payable is currently (2016) tax free” (from Pensions Authority website).
Do these statements mean that I can only get 1.5 x Final Salary as a lump sum, up to a maximum of 200K or do they mean that I could ‘build up’ my lump sum to 200K and take it all tax free (wishful thinking, perhaps …).


In my opinion it makes little sense to be over-funding to an AVC now if you are going to be hit with tax at the marginal rate on future ARF withdrawals. Its great to max up the tax free lump sum and, again in my opinion, probably sensible to get tax relief now at the marginal rate if your future withdrawals are likely to be at 20% (plus USC and possibly PRSI depending on age at drawdown). I think it makes no sense beyond this.
Is there any way to ensure that an ARF is drawn down at 20% (or whatever the lower tax rate is at the time)?

Am I correct in saying that, in retirement, a pension is taxed like any other income, perhaps at lower rate, perhaps at higher rate? Basically, in Revenue’s eyes, your pension becomes your salary and we must render unto Caesar that which is Caesar’s …. Is this broadly correct?)
Would you have any idea, is the ‘garden variety’, full service teaching pension currently taxed at 40%?
(I am making the presumption that if it is taxed at 40% now, it will probably be taxed at 40% in the future. Tax bands and rates may change, but, at this stage, there is no way to know what they will be in 20 years time, so I’ll use today’s rates).

Are you purchasing notional years with reference to age 60 or 65 ? What age do you propose to retire at ? You say you are purchasing to bring your service up to 35 years. Maximum pension is based on 40 years service. If you intend to retire at 60 then you can approximately estimate how much it may be worthwhile contributing to pension now to have maximum pension benefits then. I suggest thinking about how to tax efficiently fund maximum pension benefits at your intended retirement age, rather than focussing on maxing out all available tax relief in the interim (in my opinion!).
Poor error on my part. I am purchasing notional years with reference to age 60. I should have written “bring my service up to 40 years”, not “35 years”.
Is there then much scope at all for me to invest in AVCs (in a tax-efficient manner)?


Just one more note. You seem quite certain about not needing the Spouse and Children pension benefit. As this is included in your main scheme (at a cost of 1.5% pensionable remuneration) it will also be include in any notional years you are purchasing. You can't opt out of it - a part of what you are paying towards notional years goes towards the Spouse and Children element. AVCs are more flexible in this regard. Of course, circumstances can change too!
Circumstances may change, that is true, but it’s not looking likely! The fact that some of my Notional Service payments are going into the Spouse and Children pension had not dawned on me at all....
Is there any way to definitively say whether this should make me move from Notional Service payments to AVCs? Or are we getting into very complicated, actuarial maths there and a degree of forecasting that has no guarantee of being accurate? I understand that the Notional Service payments will, at least, give me a defined benefit, but with an AVC it is harder to definitively say what the benefits will be.

Any help/insights/experiences would be appreciated from one and all!
 
[QUOTE="Cormac, post: 1607625, member: 91417"
Do these statements mean that I can only get 1.5 x Final Salary as a lump sum, up to a maximum of 200K or do they mean that I could ‘build up’ my lump sum to 200K and take it all tax free (wishful thinking, perhaps …).[/QUOTE]

In a public service scheme the maximum tax free lump sum from all sources is 1.5 times final salary. You cannot go beyond this up to €200k.

The marginal tax rate for a single person is currently €35,300. I have no idea of the average pensionable salary for a teacher but I would guess for a teacher with full increments and relevant allowances it would be in the region of €70k+ - You are probably in a much better position to estimate this.

If you will have a full 40 years pensionable service at 60 (through actual and notional service) I don't see any point in going the AVC route. Unless you are thinking of taking cost neutral early retirement before that age?

(Just to note - when signing on for notional years I understand you are offered the option of paying for them by reference to age 60 or 65. Obviously the latter is less annually. Unless you chose 60 you will not have all your service purchased by that time).

I don't know about the relative actuarial value of notional years v AVCs, taking account of the inclusion of survivor's pension in the notional years. You would also have to consider fees and charges (and market performance) for the AVCs.
Maybe if you circumstances haven't changed in the meantime you could put the spousal pension up for offers at retirement ? :D
 
Early Riser,
Thanks again for your reply. I thought I had it clear in my head, but now I'm not so sure, so you might humour me ....

In a public service scheme the maximum tax free lump sum from all sources is 1.5 times final salary. You cannot go beyond this up to €200k.

I'm labouring the point here (and I hope I've phrased my questions in a way that's easily understood), but just so I'm clear.

No matter what my final (full-service) salary is, in my lump sum (the tax-free portion + any taxable portion) the most I can get is 1.5 x Final Salary? End of story? Revenue's rules, that's it ...?
Theoretical Scenario: Final Salary: 80K, ergo Lump Sum 120K, ergo No Tax Payable.

“The amount of cash you can get from an occupational pension scheme at normal retirement age is broadly 1.5 times your Final Remuneration” (from Pensions Authority website).
I'm confused here because they talk about 'cash'.
Could I 'over-contribute' (as it were), via AVC PRSA, and have a 'pot' above my Theoretical 120K (above)?
Theoretical Scenario: Let's say the AVC PRSA 'pot' reaches 70K.
So altogether I have my Occupational pension Pot of 120K + AVC PRSA Pot of 70K.
Can I take the 120K as tax-free cash and pay tax on the 70K (or use the 70K to fund an ARF)?

Basically, why wouldn't I max out my tax relief, put as much money into an AVC PRSA, benefit from the Revenue's money now, have that money grow at a compound rate and pay tax on it in the future?
Is it the 1.5 x Final Salary rule that is stopping me doing this?
 
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