I am 67 years old and plan to retire from my full-time public sector role in mid-2026 and draw down my pension together with a lump sum of around €82,000 (after 15 years in public sector). My salary is currently €140,000.
At age 60 I also drew down a private sector pension which included a lump sum of €124,000 after 33 years in private sector.
In an effort to maximise cash, two years ago I bought a last-minute AVC, for the maximum related to my then salary, of €38,000, and plan to draw this down when I retire in 2026. At the time, I received immediate tax relief at the top rate on the €38,000. My question is have I scope to make another payment of similar amount and get the immediate tax relief again? It would be worth a significant amount.
I have received conflicting advice from two professional sources do your view would be appreciated.
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Mr B.D.
Maximising your retirement savings while benefiting from the generous tax relief allowed by the State is up there with the most useful steps anyone can consider in their personal finances.
And using AVCs (additional voluntary contributions) is certainly a way of enhancing your pension pot when you have not maxed out the relief available and when have the financial wherewithal to pay more into the pension than is currently deducted at source by your employer.
One of the more attractive elements of a pension fund is the ability to take a portion of the fund as a tax free lump sum on retirement. Having benefited from the tax relief on the way in, this money is also exempt from income tax at retirement.
It can be used to settle outstanding debts such as a mortgage, give you the financial freedom to consider options that would not be available with your regular income or invest again in the hope of future growth.
But there are limits which is hardly surprising given the double relief effectively available on this money.
Public servants, like you, who were employed before 2013, were members of sector-specific pension scheme and you will need to check the small print of that scheme to be certain of your pension options.
But, in general, public servants can draw down a lump sum equivalent to 1.5 times their final earnings, provided they have sufficient service. Your lump sum entitlement is calculated by multiplying your years of service by your final salary and then multiplying that figure by 3/80ths.
In your case, you have 15 years of service and a salary of €140,000. That gives us 2.1 million. Multiplying this by three and then dividing by 80 gives you a lump sum entitlement from your public service of €78,750 by my calculations. That figure will obviously rise with your salary between now and retirement.
This leaves you far short of the 1.5 tax free lump sum multiple available to you as a public servant and, all other things being equal, it would make investment in an AVC a very sensible approach as you could draw down from that AVC tax free on retirement the difference between your €78,750 and the notional upper limit of €210,000.
But – and yes, there is a but – Revenue rules (and legislation) limit the size of tax free lump sums from pensions to €200,000. And, importantly, this limit covers all lump sums you receive from any occupational pensions – private and public.
So, even if you had no private sector pension, the upper limit in on the amount you could receive from your public sector employment would be €200,000 even though this would be lower than the 1.5 multiple.
In your case, you have already drawn down €124,000 as a tax free lump sum from your private sector pension. That leaves you scope only for a further €76,000 in tax free pension scheme drawdown.
As the lump sum allowance based on your 15 years of public sector service is already higher than this, anything you draw down from your AVC will be taxed.
That doesn’t entirely rule out the benefit of higher lump sums as Revenue rules state you pay income tax at just 20 per cent on pension lump sums between €200,000 and €500,000, regardless of your rate of income tax you are paying on your income in that year.
So why invest further in an AVC at all then?
Well, for two reasons really. First, you are bolstering the funds that will be available to you in retirement.
Second, there is the attractive tax relief you can get on sums invested in a pension fund. The amount you can invest in a pension while getting tax relief rises as you get older. In your sixties you can get relief on contributions of up to 40 per cent of your salary.
But again, there is a limit which will affect someone on your level of income – an upper limit on salary for tax relief purposes. This is set at €115,000, which means that even in your sixties, the maximum amount you could put into a pension in any one year for tax relief purposes is €46,000.
And this obviously includes any employee contributions to your existing public sector scheme.
With all the provisos above, I see no reason why you cannot invest a lump sum again in an AVC this year – or indeed in relation to last year – if it is done and the tax relief claimed by the end of October. If backdating the AVC contribution, you keep open the prospect of a further contribution in respect of this year.
How much you can invest which securing tax relief will depend on your existing workplace pension contributions. I would be surprised if it was as high as €38,000 but you’ll need to check what you are paying towards your public sector pension.
As, by my understanding, you will already have maxed out your tax free lump sum on retirement, anything you draw down from the AVC fund will be taxed but it can certainly provide additional income in retirement and remain invested after retirement if you choose.
I am concerned at what you say was conflicting advice from two professional sources. That’s never good though it does highlight how complex the rules around pensions are - unhelpfully so.
You don’t describe the nature of this conflicting advice but, if you are trying to figure out which is correct, you are probably best seeking a third professional opinion – making sure that whomever you approach specialises in tax and pensions rather than simply wider financial investment advice.
You have clearly had a long working life and earn good money. The upfront cost of professional advice specific to your circumstances seems to me like a good investment and should, I would argue, be a priority right now. You have a couple of months before the end-October deadline so there should be time to do this without jeopardising any available tax relief.
As I regularly remind readers, I am not a qualified or register financial adviser. And, as we note every week, the advice in this column is never designed to replace professional advice,
Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or by email todominic.coyle@irishtimes.com, with a contact phone number. This column is a reader service and is not intended to replace professional advice
