Additional Voluntary Contributions (AVCs) are a valuable tool for Irish workers looking to enhance their retirement savings. This article explores what AVCs are, how they work, and their benefits and considerations.
What are AVCs?
AVCs are extra contributions that employees can make to their existing occupational pension scheme. These contributions are made in addition to the regular pension contributions deducted from your salary.
How AVCs Work
- Contribution Limits: You can contribute up to 40% of your annual salary to your pension, including both regular contributions and AVCs. The exact percentage depends on your age.
| Age attained during the year: | Tax relief limit (% of Net Relevant Earnings) |
| Less than 30 years old | 15% |
| 30 to 39 years old | 20% |
| 40 to 49 years old | 25% |
| 50 to 54 years old | 30% |
| 55 to 59 years old | 35% |
| 60 and over | 40% |
The maximum amount of earnings taken into account for calculating tax relief is currently €115,000 per year.
- Tax Benefits: AVCs enjoy the same tax relief as standard pension contributions. This means you can claim tax relief at your highest rate of income tax.
- Investment: You can diversify the AVC part of your pension by getting advice from a good financial advisor.
- Flexibility: You can start, stop, or adjust your AVC payments at any time, offering flexibility to suit your financial situation. You can also make a lump sum contribution to an AVC before the tax deadline at the end of October each year and offset the contribution against income tax paid in the previous year. By doing so you will be entitled to a refund from revenue.
Benefits of AVCs
- Boost Retirement Income: AVCs can significantly increase your pension pot, potentially leading to a more comfortable retirement.
- Tax Efficiency: The tax relief on contributions makes AVCs an attractive savings option.
- Catch-Up Opportunity: For those who started pension savings late or have gaps in their contributions, AVCs offer a way to catch up.
- Additional Lump Sum: At retirement, you may be able to take a larger tax-free lump sum due to your increased fund value.
Considerations for AVCs
- Investment Risk: Like all investments, AVCs carry some risk. The value of your fund can go up or down.
- Charges: Be aware of any additional charges associated with AVCs.
- Access Restrictions: Generally, you cannot access AVC funds until retirement age.
Conclusion
AVCs can be an excellent way to boost your pension savings in Ireland, offering tax efficiency and the potential for increased retirement income. However, it’s crucial to consider your overall financial situation and retirement goals before committing to AVCs.
At this time every year, thousands of people across Ireland take the opportunity to use their pension to reduce their overall tax liability. This can be achieved by making a lump sum Personal Pension, PRSA or PRSA AVC contribution, depending on your employment circumstances, by 31 October 2024 (or 14th November 2024 if you file online) and electing to backdate the tax relief to 2023. Consulting with a financial advisor can help you make an informed decision about whether AVCs are right for you.