Public Sector AVC's

Am I creating a tax Liability at retirement?

Public Sector AVC's

Am I creating a tax Liability at retirement?

If you have an AVC, or are planning to contribute into an AVC, it is imperative that you take time to fully understand the main functions and benefits of an AVC and how it is going to improve your retirement plan. From our experience in dealing with AVC and retirement queries over the past 20 years, this is not the case with the majority of public sector employees.

It is important to know where you stand with your AVC, whether you should stop, start or restart your AVC, and if you have an AVC, whether you are overfunded or underfunded.


AVCs are basically a long-term savings plan that qualifies for tax relief at your marginal rate (20% or 40%). Access is restricted to your retirement date.


However public servants across the country have a misunderstanding of AVCs how to use them as a vehicle to reduce their tax bill and increase their tax-free lump sums at retirement.


The two main functions of an AVC are as follows:






1- To maximize tax-free lump sum entitlements on retirement

All public sector employees can use an AVC to max out their tax-free lump sum entitlement. It is very tax efficient and is highly recommended to do this as all contributions qualify for tax relief at your higher income tax rate (usually 40%) on entry and can also be withdrawn tax free on retirement.


The optimal amount of money required to contribute into an AVC to max out your tax free lump sum depends on your shortfall on retirement. This calculation is usually directly correlated to your years of service at retirement and your final pensionable salary. It is very important for all public sector employees to know their shortfall and use an AVC to bridge the gap.


However, any AVC funds above this amount will create a tax liability. The funds are treated as income and liable to income tax, USC and PRSI. The liability can be as high as 52% for many retirees.

2- Buy back Years of Service.

AVC money can also be used to buy back years of actual/notional service. However, in our experience, the cost of buying back service can be very expensive and rarely makes financially sense. Nevertheless, it is important to check to see how much it costs to buy back a year of service and how much additional pension income will be incurred in retirement for this.


After you draw down your tax free AVC funds and/or buy back any years of service, any additional funds are taxable. These surplus funds are then transferred into another pension vehicle called an Approved Retirement fund (ARF). Funds are withdrawn each year from your ARF for as long as they last. They are however taxable at your marginal rate of tax.

If you have an AVC, or are planning to contribute into an AVC, it is imperative that you take time to fully understand the main functions and benefits of an AVC and how it is going to improve your retirement plan. From our experience in dealing with AVC and retirement queries over the past 20 years, this is not the case with the majority of public sector employees.

It is important to know where you stand with your AVC, whether you should stop, start or restart your AVC, and if you have an AVC, whether you are overfunded or underfunded.


AVCs are basically a long-term savings plan that qualifies for tax relief at your marginal rate (20% or 40%). Access is restricted to your retirement date.


However public servants across the country have a misunderstanding of AVCs how to use them as a vehicle to reduce their tax bill and increase their tax-free lump sums at retirement.


The two main functions of an AVC are as follows:




1- To maximize tax-free lump sum entitlements on retirement

All public sector employees can use an AVC to max out their tax-free lump sum entitlement. It is very tax efficient and is highly recommended to do this as all contributions qualify for tax relief at your higher income tax rate (usually 40%) on entry and can also be withdrawn tax free on retirement.


The optimal amount of money required to contribute into an AVC to max out your tax free lump sum depends on your shortfall on retirement. This calculation is usually directly correlated to your years of service at retirement and your final pensionable salary. It is very important for all public sector employees to know their shortfall and use an AVC to bridge the gap.


However, any AVC funds above this amount will create a tax liability. The funds are treated as income and liable to income tax, USC and PRSI. The liability can be as high as 52% for many retirees.

2- Buy back Years of Service.

AVC money can also be used to buy back years of actual/notional service. However, in our experience, the cost of buying back service can be very expensive and rarely makes financially sense. Nevertheless, it is important to check to see how much it costs to buy back a year of service and how much additional pension income will be incurred in retirement for this.


After you draw down your tax free AVC funds and/or buy back any years of service, any additional funds are taxable. These surplus funds are then transferred into another pension vehicle called an Approved Retirement fund (ARF). Funds are withdrawn each year from your ARF for as long as they last. They are however taxable at your marginal rate of tax.

Please see below a diagram to illustrate this:

How much should I contribute into an AVC? Should I start, stop or restart it?

As stated above, the optimal amount that is required in your AVC is your tax free lump shortfall. It is important that all public sector employees know this number. There are some very clever ways to increase this figure so it is important to chat to experienced advisors on how to achieve this. Your shortfall can be made up by contributing on a monthly basis over a long term period or alternatively a Last Minute AVC can be used closer to your retirement age.

Already have an AVC…….Are you overfunded or underfunded?

If you have a tax free lump sum shortfall and have less than this amount in your AVC, you are what we called Underfunded. It is advisable to start or restart your existing AVC to make up this shortfall prior to your retirement.


If you currently have an AVC and have excess funds over your tax free lump sum shortfall, you are what we call Overfunded. These excess funds could be liable to up to 52% tax, (income tax, USC and PRSI) on retirement. From our experience, many public sector employees are actually overfunded and will have a significant tax liability on retirement. In these circumstances we recommend that you stop paying into your AVC, analyze where your existing AVC funds are invested and the charging structure this AVC provider is charging you etc.


While you maybe overfunded, by effectively managing your paid up AVC funds and obtaining very competitive annual management charges, you can make significant gains on these funds which can somewhat be offset against the tax you will pay on exit.

Please see below a diagram to illustrate this:

How much should I contribute into an AVC? Should I start, stop or restart it?

As stated above, the optimal amount that is required in your AVC is your tax free lump shortfall. It is important that all public sector employees know this number. There are some very clever ways to increase this figure so it is important to chat to experienced advisors on how to achieve this. Your shortfall can be made up by contributing on a monthly basis over a long term period or alternatively a Last Minute AVC can be used closer to your retirement age.

Already have an AVC…….Are you overfunded or underfunded?

If you have a tax free lump sum shortfall and have less than this amount in your AVC, you are what we called Underfunded. It is advisable to start or restart your existing AVC to make up this shortfall prior to your retirement.


If you currently have an AVC and have excess funds over your tax free lump sum shortfall, you are what we call Overfunded. These excess funds could be liable to up to 52% tax, (income tax, USC and PRSI) on retirement. From our experience, many public sector employees are actually overfunded and will have a significant tax liability on retirement. In these circumstances we recommend that you stop paying into your AVC, analyze where your existing AVC funds are invested and the charging structure this AVC provider is charging you etc.


While you maybe overfunded, by effectively managing your paid up AVC funds and obtaining very competitive annual management charges, you can make significant gains on these funds which can somewhat be offset against the tax you will pay on exit.

Cashflow problems and State pension’s deferred entitlement


Below is an illustration of the cash flow and difficulties that many public sector workers face from their retirement age to their state pension age.


Public Sector Penson income illustration

Cashflow problems and State pension’s deferred entitlement


Below is an illustration of the cash flow and difficulties that many public sector workers face from their retirement age to their state pension age.


Public Sector Penson income illustration

If you are overfunded have excess funds in your AVC, on retirement you will usually be transferring these into an Approved Retirement Fund. It may be tax efficient to draw these down in the years prior to receiving your State Pension entitlement at (67/68). This will bump up your income in your 60s as well as having more scope to draw down your taxable ARF income in the lower income tax rate band. The state pension entitlement €12912 usually pushes many civil servants into the higher income tax rate band of 40%.

It is very important to be aware of the thresholds and rules in retirement in order to draw down any excess funds from your AVC as tax efficiently as possible. For example, from age 65 onwards, there are tax free income thresholds - once you don’t exceed these you pay zero tax. The threshold for a single person is €18,000 per annum and €36,000 per annum for a married couple. From age 66 onwards you don’t pay any PRSI.

From our experience, many retired employees ignore many of these thresholds and tax efficient strategies and end up paying way more tax on their income than they should.


If you are overfunded have excess funds in your AVC, on retirement you will usually be transferring these into an Approved Retirement Fund. It may be tax efficient to draw these down in the years prior to receiving your State Pension entitlement at (67/68). This will bump up your income in your 60s as well as having more scope to draw down your taxable ARF income in the lower income tax rate band. The state pension entitlement €12912 usually pushes many civil servants into the higher income tax rate band of 40%.

It is very important to be aware of the thresholds and rules in retirement in order to draw down any excess funds from your AVC as tax efficiently as possible. For example, from age 65 onwards, there are tax free income thresholds - once you don’t exceed these you pay zero tax. The threshold for a single person is €18,000 per annum and €36,000 per annum for a married couple. From age 66 onwards you don’t pay any PRSI.

From our experience, many retired employees ignore many of these thresholds and tax efficient strategies and end up paying way more tax on their income than they should.


Work out your AVC calculation requirements now

© 2020 Money Maximiser | Money Maximising Advisors Limited is regulated by the Central Bank of Ireland - C154250 | Privacy Policy

Work out your AVC calculation requirements now

© 2020 Money Maximiser | Money Maximising Advisors Limited is regulated by the Central Bank of Ireland - C154250 | Privacy Policy