Tuesday 17 September 2019

Your questions answered: What can I do with cash left over in AVC?


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Trevor Booth - Head of Personal Financial Planning at Mercer (mercer.ie)

Q I am a teacher and I plan to retire this year at the age of 60. I will have about 31 years' service. I will get a pension of about €25,000 and a lump sum of around €75,000. I also did an Additional Voluntary Contribution (AVC) scheme with Irish Life which is valued at about €70,000. I understand I can use some of this money (€25,000 tax-free) to top up my lump sum to €100,000. My big problem is with what's left over from my AVC - which would be €45,000. I now realise I contributed too much to my AVC when there was no need. If I withdraw the €45,000, it will be taxed at 40pc. What is the wisest option for me now with regards to the €45,000 - that is, should I withdraw it or invest it? I'm green when it comes to investment, shares and so on. Norma, Co Kilkenny

You have the option to take the balance of your AVCs as a taxable lump sum, purchase an annuity or invest in an Approved Retirement Fund (ARF - a personal retirement fund where you keep your money invested after retirement).

If you withdraw a taxable lump sum at the point you retire, you will pay income tax on that amount at your marginal rate, which you have said will be the highest rate of 40pc. You will also pay Universal Social Charge (USC) on the amount withdrawn.

While your income at the moment brings your marginal rate of income tax for this tax year to 40pc, in future years it may not. If that is the case, it may be worth deferring the date at which you withdraw part of your fund - rather than taking it as a taxable lump sum now.

To defer the withdrawal of income from your AVC, you could transfer the balance remaining into an ARF and withdraw income over future years. If your marginal income tax rate is 20pc at the time of your withdrawals, you may possibly pay only standard-rate income tax on your withdrawals. However, withdrawals from an ARF are also subject to USC and PRSI until State pension age. (The State pension age is currently 66).

Even if you will be a higher-rate tax payer in your retirement, there are advantages to holding your AVCs in an ARF rather than taking a taxable lump sum. Those advantages include tax-free investment growth within the ARF and reduced tax payable on inheritance of the ARF if you have children. However, these advantages could be negated if you do not generate sufficient investment growth on your fund or, worse, if your fund is eroded by fees on the ARF and there is little investment growth.

You could also use the AVC to purchase an annuity which would provide a lifelong income. That amount may be taxed at a lower rate than would be the case if you take the lump sum option now - if you are not subject to higher-rate income tax in the future.

In any event, this is one of the more important decisions in your retirement planning. You will need good advice on which option is best for you and should therefore speak to a good adviser, who will be able to devise a strategy for you to follow.

Best options for opening ARF

Q I have a self-administered AVC Personal Retirement Savings Account (PRSA) - mostly in individual shares and funds with a number of different providers such as Standard Life, Zurich and Davy Select. My intention when it comes to retirement is to take out an ARF. Do I have to go with one provider or can I take out individual ARFs with each of the companies? Also, if I have shares in the AVC PRSA, can I transfer them into the ARF without selling them? Eamon, Co Cork

You can have multiple Approved Retirement Funds (ARFs) with multiple providers. This approach is sometimes used to spread funds across different investment managers, but it appears that your current provider gives you access to multiple investment managers. You can transfer the shares from your PRSA AVC to your ARF provided the ARF administrator is willing to accept the transfer of the securities, which many will not.

However, it should be possible to continue with the same PRSA AVC, which is for all purposes treated as an ARF, into your retirement. This may prevent the need to dispose of the assets you hold in your PRSA AVC unless you want to provide for a retirement lump sum drawdown at your retirement date.

You should be aware of the expenses incurred by your arrangement, as it may be possible to find a less expensive alternative with the same or similar options. Your retirement is a good time to review your pension against others available in the market.

PRSAs for day job and farm

Q I have a PRSA AVC linked to my work in which I pay in a percentage of my salary each year. When I retire from my day job, it will turn into a pension. How will that affect my other PRSA which is not an AVC linked to my PAYE job but is a standalone PRSA linked to farming income from some land which I am farming? Can I still continue to pay into the farming PRSA after I retire from my day job - and convert the AVC to a pension? Carmel, Co Tipperary

A Your PRSA AVC and PRSA are separate pensions linked to two different employments, so you can take your pension from either at separate times.

When you retire from the main employment, you can convert that PRSA AVC - based on the benefit options set out by the scheme administrator. These are likely to include providing a retirement lump sum, purchasing an annuity, investing in an ARF or taking a taxable lump sum. You can continue to fund your PRSA from your farming earnings after you retire from your employment and take the benefits at a later stage.

Should son delay pension?

Q My son has been working for a medical company for two years and is now in a position to join up to the company pension scheme. He is 35 years old and is not paying into any pension scheme. I am wondering would he be best to join the company pension scheme now or alternatively wait until 2022 when the Government is expected to introduce the auto-enrolment scheme? Joe, Dublin 14

A My advice is usually to start saving to your pension as soon as possible, rather than defer the decision. The earlier your son starts, the greater his fund is likely to be due to his higher level of contributions and the compound effect of growth on his fund.

It is likely that the company will contribute to your son's pension scheme, in which case he could be losing out on employer contributions for every month he does not join the scheme. There could be other advantages to joining, such as death-in-service benefits.

The details of the auto-enrolment scheme have not yet been announced and it will be some years before the scheme is introduced. In the meantime, your son could have lost out on valuable contributions to his pension.

The employer contributions to many employer-sponsored pension schemes may be higher than the initial rates for auto-enrolment.

The introduction of auto-enrolment may, therefore, not improve the benefits being provided, at least for a number of years after introduction until contribution rates are increased.

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