Additional Voluntary Contributions
Members of an occupational pension scheme and public sector employees can also make additional voluntary contributions (AVCs) to their pension.
Additional Voluntary Contributions or AVCs are extra savings which you can make towards your pension.
These AVCs can be made to either your employer scheme, or independently to your own arrangement known as PRSA AVCs.
What are the benefits of making AVCs?
Additional Voluntary Contributions are a very tax efficient way of saving for your future. AVC pension contributions are treated the same as normal pension contributions for tax purposes, so you qualify for tax relief at your higher rate of tax.
|If you pay tax at 40%||If you pay tax at 20%|
|€100||Total investment to your pension||€100|
|-€40||Less tax saved||-€20|
|€60||Net cost to you||€80|
Based on the example above, if you decided to make an AVC of €100 and you are on the 40% rate of tax, you would receive tax relief at 40%. That means a €40 saving for you!
Any growth on your AVC pension investment funds are also tax free.
Additional Voluntary Contributions are very flexible
AVC pensions allow you to vary the amount you are contributing and you can even cease making AVC pension contributions at any time.
Your AVC pension benefit must be administered in the same way and at the same time as your retirement benefits under your main pension scheme. If you leave your company, you can leave your AVC pension fund invested until retirement or transfer to your new employer’s pension fund, or a Personal Retirement Bond (PRB) which is a personal policy purchased by the trustees in your name (subject to scheme rules).
You can choose to retain control of your fund post retirement in an Approved Retirement Fund (ARF), which is a tax-free investment fund held in your own name and managed by a Qualifying Fund Manager (subject to certain conditions). This means your AVC pension remains invested on a tax-free basis until you need to access it. You will need to pay tax on the withdrawals as if it was income.
What can I use my AVC pension fund for?
Tax-free lump sum
This is a very tax-efficient way to maximise your benefits. All scheme members should consider building up an AVC pension fund at least as big as their expected tax-free lump sum.
Increase your pension amount in retirement
If you have low expected pension benefits, AVCs can be a great tax-efficient way to increase your overall retirement income. They can also boost your pension if you would like to retire early.
What scope do I have for making AVCs?
Normally the retirement benefits which are payable under the rules of your main company pension plan are lower than the maximum benefits which are permitted by the Revenue Commissioners. Therefore, most people have scope to pay AVCs to increase their retirement benefits without the risk of breaching Revenue maximum benefits rules. For example, some of your earnings may not be included in the calculation of the pension amount payable from your main plan – e.g. overtime, bonuses, commission or car allowance or you may have entered your pension plan at an age when you are not expected to receive full pension benefits from your company’s main pension plan when you retire.
Please contact one of our experienced financial advisers who will be happy to answer any queries you may have.