People at the early stages of their careers are often only able to afford quite low levels of pension contributions. Happily they can catch up later on by making additional voluntary contributions (AVCs).
“The State encourages people to save more towards retirement and provides generous tax relief on pension savings. AVCs were introduced as a way of topping up a person’s pension savings and are the best and most tax-efficient way for people to boost their pension pot,” explains Shane O’Farrell, Irish Life Corporate Business’s director of corporate partnerships.
“Simply put, they are a great way to take control of your financial future and build towards a better life after work. You can choose to make regular ongoing AVCs to your pension, or once-off payments. Both are eligible for tax relief and you have the flexibility to increase, decrease or cease payments at any time.”
AVCs are treated the same way as normal pension savings for tax purposes, meaning you qualify for tax relief at your marginal rate. So, for every €100 you contribute to an AVC, it only costs you €60 if you pay tax at 40 per cent, but the full €100 is invested in your pension plan. Moreover, any growth on your AVC fund is also tax free.
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Some of the benefits AVCs can provide at retirement include access to an immediate cash lump sum, the option to purchase an annuity to provide an income for life, the option to transfer the pension fund to an approved retirement fund (ARF) or the ability to increase the tax-free lump sum on retirement.
“AVCs are a great way to top up your savings, reducing the shortfall and making the most of the tax relief at the same time. Often people with short service or looking to retire early need AVCs to give them a boost,” says O’Farrell.
“If you can afford to maximise the tax relief available throughout your career, it really is a great perk to avail of.”
CSO data indicates Irish people are among the best savers in Europe, “but are we saving in the most efficient way?” asks Bernard Walsh, head of pensions and investments at Bank of Ireland.
“AVCs are an unbelievably tax efficient way of putting money aside for yourself. The way life is, we currently work Monday, Tuesday and Wednesday for ourselves, and Thursday and Friday for the Government,” he adds, pointing out that relief means we get part of Thursday morning back for ourselves too.
It can lead to a bigger tax-free lump sum on retirement or a chance to get more income in retirement. Over time, a small percentage increase in contributions can make an enormous difference to the ultimate outcome, explains Walsh.
AVCs can also allow you a chance to vary your investment strategy, enabling you to gain the benefits of diversification too, he adds.
“Anyone who is a member of their employer’s occupational pension scheme can make payments into an AVC,” explains AIB’s head of customer financial planning, Michael Cosgrave.
You can increase, decrease or stop them at any time.
“Firstly you decide on the amount that you can afford to contribute, then advise your employer who will input the figure into the payroll system which will automatically apply the appropriate rate of tax relief. Your employer will then send the payment on to your pension provider for investment into your retirement account on your behalf,” he explains.
There is a maximum amount you may pay in and claim tax relief on each year. The maximum pension contributions on which you can claim tax relief in any year is age related and is expressed as a percentage of our gross income. So, for the under 30s, it’s 15 per cent, rising to 40 per cent for those aged 60 and over. In addition, the maximum gross income figure on which you can claim tax relief is €115,000.
“AVCs are a good way for customers to top up their pensions at times when their income allows it. At AIB we recommend that you regularly review the options for AVCs to ensure they are appropriate to your plans for at various life stages,” he adds.
