UNIVERSITY OF LIMERICK
ADDITIONAL VOLUNTARY CONTRIBUTIONS
October 2014
Jim O'Neill MIIPM
QFA, FLIA
Agenda
• Main scheme pension benefits
• Additional Voluntary Contributions (AVCs)
• Investment Considerations
• Questions
MERCER
08 April 2015
1
Main Scheme BenefitsAppointed before 6th April 1995
• Retirement benefits: Pension
• 1/80th of Pensionable remuneration for each year of reckonable service
subject to a maximum of 40/80ths
Plus
• Retirement benefits: Tax free lump sum
• 3/80th of Pensionable Remuneration for each year service subject to a
maximum 120/80th (1.5 times)
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08 April 2015
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Example
Pensionable service by retirement age:
40 yrs
€60,000 p.a.
Pensionable remuneration
Pension
Pension entitlement= 40 X 1/80 * €60,000 = €30,000 pension income p.a.
Plus
Tax-free lump sum 40 X 3/80ths X €60,000 = €90,000
MERCER
08 April 2015
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Main Scheme BenefitsAppointed on or after 6th April 1995 (class A PRSI)
• Retirement benefits: Pension (integrated with SW Pension)
• Pension 1/200th of Pensionable Remuneration below 3 1/3rd state
contributory pension x Pensionable Service.
PLUS
• (where applicable) 1/80th of Pensionable Remuneration over 3 1/3rd state
contributory pension X Pensionable Service.
• Retirement benefits: Tax free lump sum
• 3/80th of Pensionable Remuneration for each year service subject to a
maximum 120/80th (1.5 times)
MERCER
08 April 2015
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Example
Pensionable service by retirement age:
40 yrs
€60,000 p.a.
Pensionable remuneration
State pension (Contributory) €230.30 X 52
Limit= €11,975 x 3 1/3rd =
€11,975 p.a.
€39,918
Pension
Pension entitlement= 40/200 X €39,918 p.a. + 40/80ths x (€60,000-€39,918)
p.a. = €7,984 + €10,041= €18,025 p.a.
+ state pension
€11,975
Total €30,000 pension income p.a.
Plus Tax-free lump sum 40 X 3/80ths X €60,000 = €90,000
MERCER
08 April 2015
5
Why Should You Consider Making AVC’s
• Short Service
• Cost Neutral Early Retirement
• Tax Free Lump Sum
• Extra Flexibility-Approved Retirement Fund (ARF)
MERCER
08 April 2015
6
Maximum Gratuity
• EXAMPLE
–
–
–
–
–
–
–
–
–
Salary
€ 80,000
Service
30 Years
Gratuity
€ 80,000 X 3/80 X 30 = € 90,000
Revenue Maximum €120,000
Shortfall
€ 30,000
Solution
Build An AVC Fund Of € 30,000 And Take It Tax Free At Retirement
Only possible if less than 40 years pensionable service
Revenue maximum check in all cases but especially for Cost Neutral
Early retirement
– Overall lifetime limit of €200,000
MERCER
08 April 2015
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Why AVC’s ?
• Tax Relief On Contributions
• Tax Exempt Fund
• Option To Take Portion Of Fund Tax Free
• Flexibility In How To Use Fund At Retirement
But
• Pensions Subject To Income Tax
• Fund Cannot Be Accessed Until Retirement
MERCER
08 April 2015
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Why AVCs?-Contribution Limits
• Any pension contributions you
make (including AVCs) will be
eligible for tax relief at your
marginal rate of income tax,
subject to your age and total
taxable earnings.
• The maximum earnings on which
relief is available in 2014 is
€115,000
MERCER
08/04/2015
Age
% of Earnings
29 years or under
15%
30 – 39 years
20%
40 – 49 years
25%
50 – 54 years
30%
55 – 59 years
35%
60 years, or over
40%
Tax Relief
Example of Tax Relief on AVC Contributions
Income Tax Rate
20%
41%
Gross Monthly Contributions
€200.00
€200.00
Less income tax relief
€40.00
€82.00
Actual monthly cost
€160.00
€118.00
Marginal tax relief reduces to 40% in 2015
MERCER
08 April 2015
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What happens to your AVCs …when you retire?
You can use them to:
• increase or provide a tax-free lump sum-(up to revenue
maximum and subject to a lifetime limit of €200K)
• increase your retirement income
• increase your dependants’ pensions
• if not part of main scheme benefits, provide for
increases on your retirement income
• invest in an ARF (Approved Retirement Fund)
MERCER
08 April 2015
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What’s an ARF?
• It’s a tax-efficient investment vehicle for after you retire
• It gives you added flexibility of withdrawing cash as required in retirement
• The investment return it earns is exempt from tax
• You must withdraw a minimum of 5% p.a. of the value of the ARF
(withdrawals subject to tax, USC & PRSI) once you turn 60
• 4% minimum from 2015 (between ages 60-70)
• It is a tax-efficient inheritance planning tool
MERCER
08 April 2015
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What Happens On Your Death ?
• The Value Of Your ARF Forms Part Of Your Estate
• Tax Treatment Of ARF On Your Death
• FUND TRANSFERRED TO
INHERITANCE TAX
INCOME TAX
• SPOUSE (ARF)
NONE
NONE-Subsequent withdrawals
subject to income tax
• SPOUSE Directly (LUMP SUM
NONE
PAYE ( HIGHER RATE )
• CHILD OVER 21
NONE
Yes 30% Income Tax
• CHILD UNDER 21
MERCER
POTENTIAL
08 April 2015
NONE
13
Who Will The ARF Option Suit ?
• Those Who Consider Their Main Pension Scheme Income Sufficient In
Retirement
• Those Who Do Not Need A Regular Income From Their AVC Fund But
Who Want The Flexibility To Take Ad Hoc Amounts
• Those Who Wish To Pass On The Fund To A Relative On Death
• Those Who Do Not Need Extra Income Now But May In The Future
MERCER
08 April 2015
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Investment Considerations
AVCs Vs Notional Service Purchase (NSP)
• NSP guarantees the buy back of years to make up the shortfall in pension.
• AVCs don’t offer such a guarantee. The fund value at retirement depends
on certain assumptions:
– Contributions will increase by 3%
– Salaries will increase by 3%
– Fund assumes to grow by 5% pa-this may be more or less than the
actual return.
– Charges remain the same
MERCER
08 April 2015
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AVCs Vs Notional Service Purchase (NSP)
• We recommend that a member gets two quotations:
NSP quotation from the HR department.
AVC quotation from Mercer, then compare both.
MERCER
08 April 2015
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Plan Charges
• 0.75% of fund value- Pension levy 2014
0.15% -2015
• 5% Charge on Regular Contributions
• 1.5% Charge on Single premiums
• Policy Fee €1.90 per month. (Indexed each year)
• Annual Fund Management Charge
– Cash Fund
– Secured Performance Fund (closed)
– Capital Protection Fund
– Exempt Consensus Fund
– Exempt Active Managed Fund
– Diversified Balanced Fund
– Indexed 50/50 Equity Fund
MERCER
08 April 2015
0.75%
1.0%
1.0%
0.65%
0.75%
1.12%
0.65%
18
Question Time
MERCER
08 April 2015
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FURTHER INFORMATION
CONTACT
Jim O’Neill
Mercer
Mobile: 087-2205176
Email jim.o’neill@mercer.com
MERCER
08 April 2015
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