Can AVCs maximise your pension scheme?

Q&A:AVCs are a useful way of augmenting a pension fund, especially if it is a flexible, public-sector scheme.

Q I am a secondary teacher and started buying AVCs in January 2001 to make up for a gap in my service. In 2006 it became possible to buy back notional service, which I did. This now entitles me to a full teacher's pension when I reach 65 in eight years' time.

My AVCs now bring me above this threshold and I'm wondering what to do with them. Should I keep buying them and suffer the tax consequences or cash them in now? What would you advise?

- Ms AH, Dublin

AAdditional Voluntary Contributions (AVCs) are a very useful way of augmenting a pension fund, especially if you have not served enough years to be in a position to receive maximum pension benefits at retirement.

In the case of a defined-benefit pension scheme, such as the type pertaining for teachers in the public service particularly, they allow greater flexibility in arranging your retirement finances. This is because AVCs do not have to be invested in a retirement annuity but can continue to be invested through an Approved Retirement Fund (ARF) until the money is required. ARFs also allow you to pass on the investment through your estate should you die, where annuities usually die with you.

Back in 2001 in your position at that time, taking out AVCs made perfect sense as you clearly would not have had enough pensionable service to maximise your pension.

However, there are limits on the amount you can salt away in pension savings. This is hardly surprising, given the generous tax relief allowed on pension contributions.

The Revenue determines broadly that you can accrue a pension fund that will pay, on retirement, an income not greater than two-thirds of your income at retirement. The figures vary slightly in the public service and there are also various ways of calculating one's income at retirement but, for your purposes, the general limit still applies.

Having availed of the opportunity open to teachers under the Programme for Competitiveness and Work to buy back service through your superannuation scheme, you might well now find yourself in the position of having an overfunded pension scheme at retirement.

Should you keep buying AVCs and "suffer the tax consequences?" There seems little point in doing that as you are only deferring taxation and the Revenue can take a dim view of deliberately overfunded schemes. So should you "cash them in now?" That option is not open to you. AVCs attract the tax advantages they do on the basis that they are retirement savings. They cannot be cashed in until then.

So what can you do? Well, first off, I would talk to your pension scheme adviser. It is possible to reduce your AVC payments or even stop them altogether and allow the existing fund to continue until retirement.

You should also bear in mind that there are several purposes to which AVCs can be used. Aside from compensating for years of services, or maximising lump-sum payments at retirement - options that do not appear open to you - they can also service to inflation proof your pension. Again, as a teacher, this is probably not an option as your pension will already increase in line with pay increases to teachers still in employment.

However, AVCs can also help to provide a pension for a spouse, or to improve the status of such a pension. They can also allow you to retire early.

Further information specific to teachers on the buyback scheme of which you availed is available at:

http://www.asti.ie/pdfs/Info Leaflets/BuyBackSchemeSept2005.pdf.

However, I would suggest you get professional advice before deciding on a definite course of action.

PRSI payments

Q I am a retired teacher. I paid PRSI at special rate all my working life. Thankfully, I never had to claim. However, when it comes to the dentist, optician etc, my PRSI contribution never seems to qualify for anything. The rate is K1. Why am I still paying PRSI? - Mr PC, Donegal

AClass K applies to people like yourself who are retired and are not yet 70 years old. Clearly, they no longer pay social insurance, but you are still liable for the health contribution until the age of 70. This means that, in 2008, you are liable to 2 per cent on the first €1,925 per week and 2.5 per cent on any balance above that.

This compares to rates of about 2.9 per cent that you would be paying under Class D if you were still working as a teacher. That is less than half the 6 per cent rate applying to those who have entered the profession since 1995.

Naturally, the less PRSI you pay, the fewer benefits you receive. Under Class D, the benefits available included, where applicable, occupational injuries benefit, the carer's grant, widow(er)'s contributory pension, a contributory guardian's payment and the bereavement grant.

Why are you still paying anything? Your payment helps finance the health service. The State has decided that people earning above a certain threshold should be liable to part-fund the health services until they reach the age of 70.

Foreign property tax

Q I am Irish resident and domiciled, with a daughter who has lived and worked in London for many years. I also have some foreign property. The following sentence in your Friday, March 21st column caught my eye.

"If you are bequeathing foreign property to someone who is not tax resident in the Republic, Irish inheritance tax does not apply. However, if you are bequeathing Irish property to someone, even if they do live abroad, they will be liable to CAT."

I was about to write to my solicitor to start the process of changing my will to ensure that my daughter inherited this property separately rather than mingled with the assets to be generally divided among my children, but decided first to check the Revenue website.

Alas, you are incorrect! The leaflet put out by the Irish Revenue (IT 39) says (p.10): "Assets outside of the State are subject to gift/inheritance tax if the disponer is resident or ordinarily resident in the State at the date of the disposition."

The table in Appendix 10 line 8 also makes this clear.-

Ms M.C., e-mail

AMea culpa. You are quite right. In the case of foreign property, if either the benefactor or the beneficiary is Irish resident for tax purposes or Irish domiciled, Irish capital acquisition tax applies. Apologies for the silly error and for any confusion caused.

• Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or by e-mail to dcoyle@irish-times.ie.