For those who can afford it, making additional voluntary contributions (AVCs) is a great way to increase your retirement provision. For instance, a member of an occupational pension scheme between the age of 40 and 49 is able to contribute 25 per cent of their income into a pension and receive tax relief for it. This can be done monthly or in a lump sum before the October 31st tax deadline each year and can amount to a tidy sum, especially for someone paying marginal tax at 40 per cent.
According to the CSO, in 2024 the average private pension pot in the State was only €111,000. If you factor in a tax-free lump sum of, in this case, 25 per cent (€27,750) this means that there is only €83,250 left to receive an income from. Using the traditional post-retirement withdrawal rate of 4 per cent, this would equate to just an additional income of €3,330 annually, leaving the pensioner having to live for the most part on the State pension.
You should never miss an opportunity to increase this provision, says Cian Morrissey of Morrisey Wealth Management, who notes that the percentage of your salary that you can contribute to your pension increases as you get older.
“You do not have to arrange the AVC with your employer; you can do this through an independent broker. Find one who will also review your occupational scheme. This means that a plan can be made with your AVCs to increase diversity. For instance, you could be in a company scheme that is actively managed, and you could do an AVC that is indexed to the US S&P 500. Many pension holders are in ‘default’ investments in the company pension with investment based on their age rather than risk appetite and financial goals so independent advice is valuable,” he explains.
RM Block
Starting early is the mantra of most pension advisers.. Munro O’Dwyer of PwC advises younger workers to contribute as much as they can afford to maximise matching contributions from employers where this option exists, but to be realistic about what they can afford at a time when they are likely to have other significant strains on their finances, such as saving a deposit for a mortgage.
Postponing getting on the property ladder because you are feeding most of your spare cash into building your pension pot doesn’t make sense financially.
“When you get into your 40s and beyond, and life has evened itself out a bit and things are more in control, and when your pension is becoming more a priority, you can move up a gear or two,” says O’Dwyer.
Another reason younger workers might want to think twice about maximising their AVCs is the increased mobility of the younger workforce, he adds. Moving occupational pension schemes abroad can be difficult and tax inefficient.
“You should not be making contributions in Ireland if you are going to retire in the US, for example. That would be tax inefficient”
One of criticisms of the My Future Fund scheme has been the inability, for the time being at least, of members to make additional contributions to bolster their pension pot. That’s not a big issue right now, where the big point is enrolling people who have no pension provision, but as workers see the benefits of maximising their entitlements, that could well change.
