A last minute AVC for a teacher?

acequion

I'm a bit confused because I've got some conflicting retirement planning advice. As a secondary teacher, I'm public service. I'm very close to retirement, most likely one more school year to go. Because I've stayed on in the job longer than I thought I would [over 60 now]and I'm buying back 10 years in Notional Service, I'll will have close to the maximum service, probably something like 38.5 years. I have a small sum in an AVC/PRSA from Zurich that I stopped last year and will be able to use some of that tax free to top up my lump sum, but there will be a sum left over. I have reached that lucky stage in life where I don't need all my income so I always have a lot of money left over in my current account, plus some savings. Today I had a free consultation with a Cornmarket rep who was really pushing me towards starting another AVC, plus a backdated one for last year by lump sum, with a view to transferring it into an ARF on retirement. Last year I got impartial money advice and was told to stop the Zurich AVC and not to take out another one, that drawing from and investing savings and some of my lump sum would be a better way to boost income post retirement. The logic was that the charges associated with AVCs don't make them so cost effective.

Two conflicting viewpoints and I'm caught in the middle. I don't think I'd bother with a backdated lump sum AVC as I'd pay an additional 4% on that to Irish Life, but I'm tempted to start a new pay slip AVC because it seems a more cost efficient way to save money rather than have it sitting in the current account. I would get 40% tax relief on contributions, transfer to an ARF on retirement from where I'd pay 20% on whatever amounts I'd draw out. I'm aware that Cornmarket charge almost €600 to set up the AVC but that too is tax deductible. Sounds an ok deal where I would gain more than I'd lose, but am I missing something?

Really not sure what to do, Cornmarket obviously have a vested interest in their "free" financial advice and the rep was pushing me to invest big amounts in the AVC about which I'm skeptical. So any impartial suggestions would be most appreciated. Thanks a lot.

Geuze

If you don't like paying Cornmarket's fees, you are of course free to use another broker that charges lower fees.

You could use an execution-only broker, for low fees.

It is possible to get 100% allocation and 1% AMC on PRSA-AVC, but I don't know the rates for short-term last minute AVCs.

Jim2007

Car salesmen, bank financial advisers, insurance company advisors etc all have one thing in common - they are not going to sell you something they don't have sitting on the lot. That is not to say they might not provide you with a couple of good insights, but at the end of the day they are salesmen. You went and got independent financial advice and I assume paid for it, so then take that advice and don't be distracted by the noise created by the salesmen. And if you do need further advice, then go back to your independent advisor. They will know your financial background and be better able to advise you than anything you hear from some random person on the internet.

Unknownability

Other than get proper independent advice the only thing I'd say to you is investment growth in a pension product isn't taxable where as investing from savings is taxed punitivly and done every 8 years negating the benefits of compounding.

acequion

https://www.boards.ie/discussion/comment/120277377#Comment_120277377

Thanks Unknownability for your input. In simpler language are you basically saying that it's better to put money into an AVC and then ARF rather than have savings lying dormant? And may I ask what you mean re taxing every 8 years? Thanks a lot.

acequion

Thanks for the replies. If I may clarify, my question is not which company to do an AVC with as I'm already aware of how they differ and have all the relevant info re fees, rates etc. My question is whether I should do an AVC, full stop.

I disagree re getting advice on the Internet. I've often got excellent advice here on Boards which is why I'm seeking it here again. Yes I paid for the independent financial advice a few years ago and it was very good but that source of advice is no longer available unfortunately.

My dilemma is quite simple and I'd be hoping to come across other posters who are or have been in the same situation. Do I invest a small amount in an AVC now to transfer to an ARF on retirement? Or do I wait until I retire in about 18 months and invest savings then? Thanks.

Unknownability

https://www.boards.ie/discussion/comment/120280065#Comment_120280065

I'm saying something like that. I'll give a basic exaggerated example,

you go to the bank take out 100k and invest it in a bond the price doubles you get back €200k you give the tax man €33k.

You do the same investment in a pension product you keep all the gain and get relief on the initial investment.

Around the 8 year thing, every 8 years the goverment wants the tax owed on an investment so the provider does a deemed disposal and pays the tax owed on your behalf.

acequion

https://www.boards.ie/discussion/comment/120280615#Comment_120280615

Thanks again. But I would be taxed on the drawdowns from an ARF, though at the lower rate I was told.

How about skipping the AVC and investing some of my savings in an ARF on retirement? That an option or must you do AVC to get to ARF?

Unknownability

https://www.boards.ie/discussion/comment/120281659#Comment_120281659

Yes, you would be taxed on it as income.

You're better off paying for advice.

You can't add money into an ARF it needs to come from a pension product.

Henry Ford III

https://www.boards.ie/discussion/comment/120280615#Comment_120280615

Apples and oranges really.

All withdrawals from an ARF are potentially taxable.

coylemj

https://www.boards.ie/discussion/comment/120281659#Comment_120281659

Money you withdraw from an ARF (Revenue call it a 'distribution') is taxed at your marginal PAYE rate, plus USC. And if you're under 66, Class S PRSI @ 4%.

acequion

https://www.boards.ie/discussion/comment/120283251#Comment_120283251

Excuse my ignorance but is 4% a lot to pay in PRSI? [I'm class A1] And do I understand that after 66 I would pay less PRSI on drawdowns?

Unknownability

https://www.boards.ie/discussion/comment/120282537#Comment_120282537

The second part of the sentence is fairly pointless.

For me getting tax relief on the premium and tax free growth would make it a clear front runner.

coylemj

https://www.boards.ie/discussion/comment/120283406#Comment_120283406

It's peanuts compared to what it would cost someone in the private sector to buy an inflation-proof pension.

Henry Ford III

https://www.boards.ie/discussion/comment/120283433#Comment_120283433

If you have to pay top rate tax on the way out, and you might, it's debatable.

GNWoodd

https://www.boards.ie/discussion/2058285490/a-last-minute-avc-for-a-teacher

There is a school of thought that for any public servant at potential maximum service , that an AVC is pointless. The thinking is that , at max service you will get a lump sum of 1.5 times salary and a pension of .5 times salary , and that they are the Revenue limits .

I am not saying that this thinking is correct . There are a few posts on Ask About Money on the subject . You are a small few months shy of full service so you have some leeway.

Insurance companies have been selling these products to public servants for the last few decades and I doubt if all of them will be short of full service at retirement .

My other concern in this area is if you did take out an AVC in the past, stayed making the contribution how does the insurance company treat your fund at retirement if you have already maxed out your Revenue limits ?

The J Stands for Jay

https://www.boards.ie/discussion/comment/120445341#Comment_120445341

There can often be a bit of scope for additional funding, based on the difference between earnings as defined by the scheme and earnings as defined by Revenue.

wads35

If you're at practically full service an AVC really is pointless. It's really only beneficial to public servants like me who won't be near 40 years service. And now the pension rules have changed for me in so far as I can make extra once per year lump sum payments directly into my public service pension which is state guaranteed and no management fees .

Stay away tbh