Additional Voluntary Contributions Donegal

Why should you make AVCs?

Additional Voluntary Contributions or AVCs are extra savings that 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 Donegal

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 highest rate of tax.

*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 that 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.

*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?

Additional Voluntary Contributions Donegal

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 31^st of October (each year) you can still qualify for 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 of 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

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.

Additional Voluntary Contributions Donegal

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 processed 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 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 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 the 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?

Additional Voluntary Contributions Donegal

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 the 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.

What some of our happy Additional Voluntary Contributions Donegal customers have to say…

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