No one wants to feel restricted in their retirement, but the truth is that many of us will need more than our pension schemes provide to maintain our current standards of living. As a result, you might want to consider paying in more to increase your benefits and minimise tax bill so you can enjoy a stress-free retirement.
Fortunately, there is a highly effective payment option in place that will allow you to increase your fund in a flexible and tax-efficient way. Here is a simple guide to Additional Voluntary Contributions in Ireland.
What Are Additional Voluntary Contributions?
How Do I Make An AVC?
First things first, you must find out from your employer if they have set up an AVC arrangement and which scheme it is under.Then, all you need to do is fill in an application form for that specific scheme and forward it to the payroll department at your job. The AVC will then be deducted from your next payslip, allowing you to get full tax relief at source. If you would like to stop, decrease or increase your AVC payments then you simply have to let payroll know and they will notify the scheme of the change.
If you prefer, you could also pay your AVC as a lump-sum rather than a regular monthly payment (subject to Revenue limits noted below). Just bear in mind that if you do this, then you must apply for a tax refund in relation to your contribution (unlike with monthly payments where this is done automatically) through filing a Form 12 or Form 11 income tax return.
What Are The Benefits Of Making AVCs?
AVCs allow you to increase your retirement fund and are a tax-efficient way of saving for your future. That’s because AVCs are taxed in the same way as your usual pension contributions, so you will qualify for relief at your highest rate of tax. For example, if you pay tax at 40% and make a €100 AVC, you would get €40 tax relief. AVCs also offer great flexibility in that you can pay as much or as little as you like (subject to limits).
AVCs are invested in funds to ensure that the money you put in has the chance to accumulate growth. This means that when you retire, subject to economic conditions, you should have more than what you paid in. Any growth on your AVC pension fund investment is tax-free.
Depending on your circumstances, at the point of retirement you can use your AVC fund to receive an immediate tax-free lump-sum, and use the remaining balance to purchase an annuity to receive an income for life, transfer it to an Approved Retirement Fund or even increase a dependent’s pension (e.g. your spouse, civil partner or child).
However, while AVCs can be great for maximising pension contributions, if your current benefits are enough you needn’t feel pressured to add any extra. If you are unsure if AVCs are the right choice for you, speak to a financial advisory service like SCK Group who will assess the benefits you are already entitled to. They will be able to best advise whether it’s in your best interests to make any additional contributions. We can of course assist you with this, so feel free to contact us with any questions.
Are There Any Limits To AVCs?
There is a maximum limit on tax relief for your annual pension contributions (including AVCs), calculated as a percentage of your gross salary according to your age. The limits are as follows:
For example, if you are aged 45 and earn €40,000 a year, you can get tax relief on annual pension contributions up to €10,000 (25% of 40,000). What this means is that you effectively get to pay into your pension pot out of your gross salary before any tax is applied. So your PAYE taxes will be calculated as €40,000 – €10,000 = €30,000 x 20% = €6,000 (ignoring tax credits for example purposes). Whereas, if no pension contribution was made, you would pay PAYE taxes on the full €40,000.
Any contributions made over the thresholds above in any given year will not qualify for tax relief in the current year, and as a result, you will pay taxes in the normal way on anything over the prescribed limit. Taking the example above, if you are aged 45 and earn €40,000 per year, if you make total employee pension contributions of €20,000, only €10,000 of this will qualify for tax relief, so your PAYE taxes will still be calculated based on €30,000 as per original example.
As well as the above limits, there is also an overall maximum earnings limit for calculating tax relief, which is currently €115,000 per year e.g. if you are aged 45 and you earn €150,000 gross, the maximum tax-relieved employee pension contribution you can make in that year is 25% of €115,000, as opposed to 25% of €150,000.
If you are self-employed or a small business owner and would like to find out more about pensions and business retirement relief we have a simple guide about sole trader pension contributions.
When Should I Start Making AVCs?
While the earlier you start contributing more to your pension the more chance you have to build up your fund, the reality is that most people don’t make additional payments at all. Currently, only between 4 and 5% of people in Ireland invest in AVCs and many of those don’t start doing so until they are in their 50s. That’s because it’s a relatively fast way of increasing your pension pot, making it a good option for those nearing retirement who think they may need a bit of a financial boost.
There are other benefits to making contributions later on. Once you reach the age of 50, you can contribute up to 30% of your income tax-free to your retirement fund, a percentage that only rises once you hit 55 and 60. However, if you are in a position to start making AVCs earlier there’s no reason why you shouldn’t.
When Can I Access My AVC Funds?
Subject to agreement from your employer and the trustees, it may be possible for you to retire from the age of 50. However, this will mean that your pension will be much lower than if you had continued in employment and continued making contributions up until your normal retirement age, which is usually set at 65.
What Happens If I Change Jobs?
If you leave your company after you have been on their pension plan for more than 2 years, then you can simply transfer your AVC pension fund to your new employer’s pension scheme. If you have been with your company for less than 2 years, then you have the option to receive your AVC funds immediately (less tax). However, you can only do this if you are also taking a refund of your regular contributions to your pension fund during this time.
Before you start paying AVCs you must have a solid understanding of the type of pension scheme you have, the benefits it will provide and the AVC options available to you. There are lots of different rules and options out there, so it’s always a good idea to get some solid financial advice before you take the plunge.
At SCK Group, we have years of experience providing financial services to businesses and individuals in Ireland. If you are starting to plan for later life, we would be delighted to help you navigate your finances and find the best solutions for a secure and stress-free retirement. If you would like to arrange a consultation, give us a call on (01) 291 0800 or fill out the form on our contact page