What is an AVC?
AVCs are essentially any extra money you contribute to your usual pension scheme. Like the rest of your pension, it’s a form of investment.
How does an AVC work?
To avail of AVCs, you must be part of a pension scheme through your company. When you have a little extra to hand, you can make either regular payments or a lump sum contribution to your pension. You can decide how much or how little to contribute.
Are AVCs tax free?
Yes! Like regular pension contributions, you can qualify for income tax relief at your marginal tax rate when you make these extra contributions.
In the example below, you’ll see how if you decided to make an AVC of €100 and pay the 40% rate of income tax, you would receive income tax relief at 40%.
|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|
Revenue sets a maximum amount that you can contribute from your taxable earnings which is based on your age (see below). The maximum amount of earnings that can be used for income tax relief purposes is €115,000.
For example, if you are aged 35, you can contribute 20% of your salary into your pension and get the tax benefit. However, you get further tax benefits as you grow older. If you are 60 years or over, you could contribute 40% of your salary tax free.
|Age||Maximum % of taxable earnings allowable for income tax relief on your pension contributions|
If a person doesn’t pay income tax, they do not qualify for income tax relief. To be eligible to claim income tax relief, your income must be taxable at either Schedule E or Schedule D (case I or II).
While any growth (aka return) on your pension is tax free, pension benefits paid in retirement are treated like all other income and subject to income tax, Universal Social Charge and Pay Related Social Insurance (PRSI), if applicable. When you retire you can usually take a retirement lump sum. Up to €200,000 of this is tax free and any amount over this is subject to income tax and other levies.
Are AVCs a good investment?
While tax advantages are the primary benefit of AVCs, it’s important to talk to a financial advisor to find the right investment for your individual circumstances.
As with all forms of investments, there are risks involved and you may lose some of or all the money you invest. It’s also important to remember the value of your investment may go down as well as up.
Can I change my AVC contributions?
Yes, they’re very flexible – you can change how much you contribute at any time. Generally, you can discuss with your payroll department to increase or lower the amount.
Are there any charges?
Certain charges can apply to AVCs including fund management charges (which apply to standard contributions) and/or a contribution charge. It’s important to research these charges in advance.
When is a good time to consider AVCs?
The best time to start is as early as possible because the sooner you start, the more money you can build up and benefit from the tax advantages. That said, you can start at any time.
Can I cash in my AVCs?
You can access your AVCs with the rest of your pension when you retire.
Additional voluntary contributions are worth considering because of the brilliant income tax reliefs involved. If you want to maximise your pension pot but aren’t sure where to start, set up a chat with Kenneth in PSF. I will be happy to go through more details with you.