Additional Voluntary Contributions Donegal

What is an AVC

Additional Voluntary Contributions (AVCs) are a simple and tax-efficient way for pension scheme members to save for their retirement.

AVCs are extra contributions made by members of group pension schemes in order to increase their benefits when they retire. These pension contributions that are made while working may be eligible for full tax relief (within Revenue limits).

Additional Voluntary Contributions Donegal

Why should you make AVCs?

Additional Voluntary Contributions or AVCs are extra savings which you can make towards your pension. Making AVCs can be a great option for you if you wish to increase the level of your retirement benefits.

Depending on your length of service at retirement you may not have the maximum benefits permitted by the Revenue Commissioners available to you or perhaps the necessary income in retirement to maintain your current lifestyle. AVCs can be used to minimize any shortfalls in your benefits at retirement.

In other words, AVCs allow you to take control of your financial future and help you to build up an adequate fund for retirement.

Why an AVC Plan may be right for you

No matter what stage of your career you’re at, an AVC Plan may make sense for you. Like most employees, you’re likely to find that an AVC Plan can help you enjoy a retirement free from financial worries – particularly if you fall into one or more of the following categories:

  • You may have missed years of service
    Employees can miss years of Superannuated Service for a variety of reasons.
    You may, for instance, have:
    • Spent years out of the workplace or started your career late
    • Taken time off or taken a career break
    • Worked in a job-sharing/work-sharing/part-time post
    • Worked abroad for a period
  • You may wish to retire early

You may want to retire before the State Pension age. Currently this is 66. In 2021 this will rise to 67 and to 68 in 2028.
If so, you could find that you haven’t ‘clocked up’ the full service you need to be eligible for the maximum benefits provided by the main Scheme. The reality is that many employees who hope to retire early may find that, when the time comes, they simply cannot afford to stop working.

  • You may wish to have greater financial freedom in retirement
    While the maximum scheme benefits are generous, even with full service you’ll find that retirement brings a significant drop in income. This is because employees who’ve clocked up full benefits by retirement age will, at most, receive a pension of half their pensionable salary.

    Nowadays, retirees usually go on to enjoy a lengthy, healthy, and active retirement. With this in mind, most people are simply not willing to contemplate a major reduction in their income at retirement.

What are the benefits of making AVCs?

Additional Voluntary Contributions are a very tax efficient way of saving for your future. AVC pensions contributions are treated the same as normal pension contributions for tax purposes, so you qualify for tax relief at your highest rate of tax.

If you pay tax at 40%*If you pay tax at 20%
€100Total Investment to your pension€100
– €40Less tax saved– €20
€ 60Net Cost to you€ 80

*Marginal tax rate as of September 2020.

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 fund investment funds is also tax free.

The Revenue Commissioners have established limits which apply to the contributions for which you can claim tax relief. A maximum earnings limit* also applies. The table below displays the percentage of your income that you can receive tax relief on when contributing to a retirement fund.
There are also limits on the benefits that may be provided at retirement.

AgeMaximum annual contributions as % of gross salary
Under 3015%
30-3920%
40-4925%
50-5430%
55-5935%
60 and over40%

*Note: In any tax year employee contributions are limited according to age and are subject to Revenue approval. This is shown in the table above. This includes any contributions to your main scheme. The maximum earnings limit for tax relief on pension contributions from 2022 is €115,000.

How to make AVCs?

Any member of a pension scheme can make AVCs. The process is simple. When you decide to make AVCs and the amount you would like to contribute, complete an application form and give it to your payroll department or advisor.

Your AVCs will then be deducted directly from your salary, so you get full tax relief at source.

You can also make once-off payments by cheque and then apply to your local Inspector of Taxes for a tax refund (see the below for more on this. Tax relief is granted at the discretion of your Inspector of Taxes and is not guaranteed.

Once-off payments and tax relief

If you decide to make a once-off lump sum payment into your pension before the 31st October (each year) you can still qualify for a tax relief in respect of the previous year.

You should note that you will need to have lodged your claim for tax relief with your local Inspector of Taxes by 31 October in any year in order for your application for tax relief to be considered by the Inspector of Taxes. You can also register your contributions on My Account on the revenue online service.
Tax relief is not guaranteed and is at the discretion of your local Inspector of Taxes.

How to pay a once-off lump sum into your pension and offset it against the previous year’s tax

Step 1 – Check your tax relief eligibility

Revenue allows us to save for retirement in a tax-efficient manner up to a certain limit. The limit increases as you get older and is expressed as a percentage of your gross earnings according to this table. Note that an earnings cap of €115,000 applies.
The percentages as set out in the table include AVCs

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Let’s look at this example

Last year, Alex was 49 and earned €65,000 (so the €115,000 earnings limit is not an issue). He contributed a total of €8,250 to the pension plan last year. He would like to put €5,000 into his plan now from personal savings and claim the tax back in respect of the 2021 tax year.

The maximum Alex can put into the pension plan now and claim back 2021 tax on is:
25% of €65,000 less the €8,250 that they already contributed last year = €8,000
So, the amount of €5,000 that Alex wishes to pay is within the tax-efficient contribution limit.

You should be sure that you are eligible for tax relief on the amount you wish to pay. You can confirm this with your local tax office if you are uncertain. You can also seek advice from a trusted pension advisor. We would be happy to advice.

Step 2 – Make your payment

Fill in your details in the Additional Voluntary Contribution (AVC) application form, available from your advisor or plan provider

To pay your lump sum you can either:

  1. Write a cheque for the amount, made payable to your plan provider
  2. Pay the amount by EFT into your plan provider’s bank account, they will be able to provide the account info.

The final deadline for receipt of the payment is 31 October 2022 (or a later date to be confirmed by Revenue if file your tax returns through ROS).

Please allow time for the bank transfer so the payment can reach your plan provider in time for these deadlines.

Step 3 – Tax certificate

Once your plan provider has received and process your application form and payment, they will then send you a tax certificate. They should do this within ten working days of receiving the payment. Keep the tax certificate in your records.
You must make your claim for tax relief and your personal tax return before the 31 October 2022 (or a later date to be confirmed by Revenue if file your tax returns through ROS). You can do this on your MyAccount on revenue online services.

Step 4 – How to make your tax relief claim

If you are a PAYE employee you can fill on “My Account” on Revenue online services, if not filing online, send your income tax form to your local Revenue office by 31 October. You don’t need to send the tax certificate that you receive from your plan provider to your local Inspector of Taxes but keep it in your records.

Further information can be found at www.revenue.ie

Please Note

The granting of tax relief is at the discretion of your local Inspector of Taxes and is not guaranteed. If you settle against this year’s income, you may not get a refund by cheque, but may receive amended tax credits instead.
If you have any queries, contact your HR department or a trusted Pension Adviser.

AVCs are a very flexible pension savings method

You can decide to increase, decrease or cease your regular contributions at any time. You can also make one-off lump sum contributions to your AVC fund if you choose, subject to Revenue limits.

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.

How to use AVCs for at retirement

There are a number of benefit options at retirement, depending on the individual circumstances of each member and Revenue restrictions:

  • Immediate cash lump sum
  • Purchase an annuity, to provide an income for life
  • Transfer the pension fund to an Approved Retirement Fund (ARF) 
  • Increase the tax-free lump sum on retirement or put the AVC pension fund towards your tax-free lump sum and avoid reducing other annual pension benefits.
  • Provide or increase dependant’s pension.

Which option or combination of options is best for you will depend on your circumstances when you retire.

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 benefit rules or reaching the standard fund threshold as described below.
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, commissions 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.

You should note however that there is a standard fund threshold in place. This is the maximum fund a person is permitted to have for providing retirement benefits. If your fund is greater than this threshold, then the amount in excess of the threshold will be subject to income tax at your marginal rate when you retire.

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Additional Voluntary Contributions FAQ’s

How much should I pay into my AVC?

Once you are a member of your employer’s Superannuation Scheme than you will be eligible to join an AVC Plan. To establish how much you should contribute, you need to know the following

  • What pension benefits you will be getting from your main scheme
  • What income you would like to have when you retire
  • When you want to retire

With this info your trusted pension advisor will be work out how much you should contribute.

Contributions are subject to the maximum contribution limit set by Revenue, and the minimum contribution of €25 per month.

How much should I pay into my AVC?

Once you are a member of your employer’s Superannuation Scheme than you will be eligible to join an AVC Plan. To establish how much you should contribute, you need to know the following

  • What pension benefits you will be getting from your main scheme
  • What income you would like to have when you retire
  • When you want to retire

With this info your trusted pension advisor will be work out how much you should contribute.

Contributions are subject to the maximum contribution limit set by Revenue, and the minimum contribution of €25 per month.

What is the maximum contribution I can make to my AVC?

The Revenue Commissioners have established limits which apply to the contributions for which you can claim tax relief. A maximum earnings limit* also applies. The table below displays the percentage of your income that you can receive tax relief on when contributing to a retirement fund.

AgeMaximum annual contributions as % of gross salary
Under 3015%
30-3920%
40-4925%
50-5430%
55-5935%
60 and over40%

*Note: In any tax year employee contributions are limited according to age and are subject to Revenue approval. This is shown in the table above. This includes any contributions to your main scheme. The maximum earnings limit for tax relief on pension contributions from 2022 is €115,000

Can I claim tax relief on AVCs?

Additional Voluntary Contributions are a very tax efficient way of saving for your future. AVC pensions contributions are treated the same as normal pension contributions for tax purposes, so you qualify for tax relief at your highest rate of tax.

If you pay tax at 40%*If you pay tax at 20%
€100Total Investment to your pension€100
– €40Less tax saved– €20
€ 60Net Cost to you€ 80

*Marginal tax rate as of September 2020.

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!

You can also obtain tax relief on backdated contributions. If you pay a lump sum to your plan b and claim tax relief on this AVC by 31st October, you can obtain tax relief in respect of the previous calendar year.

How do I decide where to invest my AVC’s?

You may be relying on your AVC to provide an important source of income in retirement, so it’s vital that you invest it wisely. There are many options available to you, from low and high-risk funds investing in particular types of assets, to managed or mixed funds investing in a spread of assets where you choose the funds or assets in which you invest.

The funds you decide to invest in should offer you a diversified range of investment options that can meet your changing circumstances over time. Any choice you make should be based on the level of investment risk you are comfortable with and should take into account your financial circumstances and goals. It is important to understand that the value of your AVC can fall as well as rise, depending on which funds or assets you invest in. You should always seek advice from a trusted pension advisor who will help you decide how and where you should invest.

With help from a trusted pension advisor, you can create a diversified range of investments within your buy out bond

Can I lose money on AVC?

Yes, it is possible that value of your AVC could go down and could go down lower than the contributions you have paid. It will greatly depend on the investment strategy you put in place for your AVC.
It is extremely important that you engage an advisor to help you understand the investment risk involved.

Warning: The value of your investment may go down as well as up. Warning: If you invest in this a AVC, you may lose some or all of the money you invest.

Is it worth paying into AVC?

Yes, if your main scheme will not provide the income, you require when you retire and or the main scheme will not provide the maximum revenue allowable tax-free lump sum when you retire.

Contributions are eligible for tax relief, which gives a significant boost to everything you save into them. As a result, an AVC pension can be a particularly tax-efficient option for people with higher incomes, as it allows you to save more of your money to enjoy in later life.

Can I cash in my AVC at 55?

Only if you are retiring and drawing the benefits from your main scheme. From age 55.
There are a number of benefit options at draw down, depending on the individual circumstances of each member and Revenue restrictions:

  • Immediate cash lump sum
  • Purchase an annuity, to provide an income for life
  • Transfer the pension fund to an Approved Retirement Fund (ARF) 
  • Increase the tax-free lump sum on retirement or put the AVC pension fund towards your tax-free lump sum and avoid reducing other annual pension benefits.
  • Provide or increase dependant’s pension.

Which option or combination of options is best for you will depend on your circumstances when you retire.

Are you taxed on AVCs?

A The big attraction of AVCs is that you get tax relief on your contributions, which provides a considerable boost to your investment, although you will be liable to pay income tax on your pension income. This will be at your marginal rate.

Can I put a lump sum into my AVC?

In addition to making contributions to your AVC Plan on a regular basis through salary, you may also contribute by way of: A lump sum or a series of lump sums.
Whichever way you choose to contribute to your AVC Plan, the amount of any lump sum contributions will be restricted by the normal Revenue maximum limits.

You can also pay a back dated contribution for the previous tax year, you will get tax relief on this contribution if done before 31st Oct each year.

Can I vary my AVC contributions?

Yes, you may increase or decrease, stop or re-start your AVC contributions when you wish. This is subject to the maximum contribution limit set by Revenue and the minimum AVC contribution level set by your plan provider.

What happens if I stop contributing to my AVC?

In general, if you stop contributing to your AVC, your AVC Investment Account will remain invested until you retire. At that point, it is available to you to ‘buy’ the retirement benefits that you are eligible for. You are not eligible to receive benefits from the AVC Scheme until you begin to draw down your benefits from the main Scheme.

What happens if I retire early due to illness?

If you retire on grounds of ill health, your AVC will be used to ‘buy’ the retirement benefits that you are eligible for, subject to Revenue limits. Please note that as you may receive additional years from your employer, this may affect how you can draw down your AVC at retirement.

What happens if I am involved in a legal separation or divorce?

If you are involved in a legal separation or divorce, a pension adjustment order may be granted by the Courts for the benefits payable from the AVC Scheme on your retirement or death.

If you have questions or need Additional Voluntary Contributions Advice, call 074 9103938 or email now