Additional Voluntary Contributions are additional pension contributions that you make in order to enhance your retirement benefits when you retire.
Why should I make Additional Voluntary Contributions (AVCs)?
Making regular Additional Voluntary Contributions can help you to build up a bigger fund for your retirement. Depending on your circumstances, you may not have the necessary income in retirement to maintain your current lifestyle. AVCs can be used to minimize any shortfalls in your benefits at retirement.
What is a last minute Additional Voluntary Contribution (AVC)?
You can make a last minute Additional Voluntary Contribution into your pension scheme before you retire. This can be particularly attractive for you if you can get tax relief on the contribution you make before you retire and if you can then get back your AVC fund as a tax free lump sum on retirement.
Please note that all last minute AVCs must be paid into you pension scheme before you actually retire, so it is important to start the process well in time before your retirement date.
How It Works
As you are nearing retirement and your gratuity under the Superannuation Scheme is likely to be less than the maximum allowed under Revenue rules because you:
- Have received a reduction in salary over the last few years, even if you have full service and/or
or
- Are short service and/or
- Have non-pensionable earnings.
- There is a special tax break under Revenue rules that you might be able to take advantage of before you retire.
- This is known as a Last Minute Additional Voluntary Contribution or AVC.
What is a Last Minute Additional Voluntary Contributions - AVC?
A Last Minute Additional Voluntary Contribution is an excellent way of funding any shortfall between the tax-free cash lump sum provided for within the Superannuation Scheme and the maximum Revenue approved tax-free cash entitlement.
The benefits of investing in a Last Minute AVC include:
- Receiving a refund of tax on pension contributions
- Maximising your tax-free cash lump sum at retirement.
3 simple Steps to make a last minute Additional Voluntary Contribution
- A single investment in an AVC is made prior to retirement. Following retirement, you get back your initial investment, less charges; and you also receive a tax rebate direct from Revenue.
- It is your own responsibility to claim the rebate from Revenue. The tax reliefs available are those currently applying, and the value of these tax reliefs apply directly to you.
- Because this is a short-term investment, it will not provide an investment return.
N.B. You can’t do a Last Minute AVC after retirement, so please ensure you get in touch in advance of your retirement date.
Are there limits to the Additional Voluntary Contributions I can pay?
AVC pension contributions that you make while working are treated the same as normal pension contributions for tax purposes, so you may qualify for tax relief at your highest rate of tax. The examples of different tax rates are shown in the table here:
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%. 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. The table below displays the percentage of your income that you can receive tax relief on when contributing to a retirement fund.
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 for 2022 is €115,000.
The amount of tax-relief allowable to offset against your pension contributions increases as you get older. So in the years before your retirement if you are aged 55 to 59 you can contribute 35% of your salary into your pension scheme for tax relief purposes. This percentage increases to 40% from age 60.
What scope do I have for making Additional Voluntary Contributions?
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.
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 are now maximum fund thresholds in place. A fund threshold is a maximum fund that a person is permitted to have for providing retirement benefits.
If your fund is greater than the fund threshold then the amount in excess of the threshold will be subject to income tax at your marginal rate when you retire. The maximum fund threshold is €2.0 Million.
What can I use Additional Voluntary Contribution 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 fund to an Approved Retirement Fund (ARF) )
- Increase your 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.
Warning: If you invest in this product you will not have any access to your money until your retirement date.
Warning: The value of your investment may go down as well as up.
Warning: The value of the fund may be affected by changes in currency exchange rates.
Warning: If you invest in this product you may lose some or all of the money you invest.
