Additional voluntary contribution (AVCs) in Ireland explained

Are you thinking about retirement or looking to boost your pension pot as you approach that stage of life? Additional voluntary contributions in Ireland can be a tax-efficient way to boost your retirement fund. This page explains what AVC pensions are, how they work, details about AVC tax relief, and the benefits they offer.

An AVC pension, short for additional voluntary contribution pension, lets you add extra funds to your occupational pension scheme, whether you work in the public sector or private sector. 

If you’re already enrolled in your employer’s pension plan, you probably make regular contributions. However, these contributions may not always be enough for your desired retirement income, and this is where an AVC pension can help.

By making AVCs, you can top up your pension pot beyond what you and your employer normally contribute. This means putting aside additional funds during your working years, which can significantly boost your retirement benefits. The extra contributions are invested, potentially growing over time.

In Ireland, many people choose to make AVCs to take advantage of tax relief. The AVC contributions you make are often eligible for tax deductions, reducing the amount of tax you pay each year, which can make saving for retirement even more attractive.

Anyone in a company pension scheme can contribute to AVC pensions in Ireland, provided the scheme allows for AVCs. You can add money regularly or as a lump sum when you have extra to spare. It’s up to you how much you contribute, but it’s worth being aware of the limits set by Revenue when it comes to tax relief, as these generally dictate the maximum AVC contributions in Ireland.

To start making AVCs, you fill out a form stating how much you want to contribute and give it to your payroll department. Contributions are deducted directly from your salary, so you get AVC tax relief straight away. You can also make once-off payments on your own, but you’ll need to claim tax relief from Revenue.

In Ireland, AVCs operate within your employer’s pension scheme, but are managed by an insurance company or specialised provider, so typical rates of return can vary. If your employer doesn’t offer AVC pensions, they must provide an alternative pension option, like a PRSA, to allow employees to make additional contributions.

Your AVC pension’s growth depends on your contributions, investment performance, and any associated charges. Like any investment, there is inherent risk, meaning the value of your investment can go up or down before you access the funds.

How much you contribute to your AVC pension is largely determined by the tax relief limits on pension contributions in Ireland, which are tied to your income tax rate.

As you approach retirement, the percentage of your salary that you can contribute to your pension and still benefit from tax relief increases:

• Ages 55 to 59: Up to 35% of your salary.

• Ages 60 and above: Up to 40%.

For example, someone who is 57 and earns €100,000 annually can contribute up to €35,000 (35% of €100,000) towards their pension and receive tax relief on this contribution. The idea behind these limits is to encourage people to make higher contributions as they get closer to retirement age, ensuring they have adequate savings. 

In Ireland, there is also a maximum earnings limit of €115,000 for tax relief on pension contributions. This means that, if you earn more than €115,000 per year, you can still make further additional voluntary contributions, but you’ll only get tax relief on the first €115,000 of your income.

It’s also worth considering whether your chosen AVC pension contributions fit within your budget and allow you to meet current expenses comfortably. Saving for the future shouldn’t compromise your financial stability now.

By maximising your contributions within these AVC limits in Ireland, you can potentially increase your retirement savings. However, it can help to contact a financial or pensions advisor to avoid unanticipated tax liabilities.

You might now be wondering: are AVCs worth it? While tax relief is often the main attraction of AVCs, there are some further advantages of AVC pensions, including: 

• AVC pension growth is tax-free: AVCs in Ireland are deducted from your salary before tax, which means you pay less tax on your income now. What’s more, any increase in the value of your AVC pension fund investments is also tax-free.

• Maximise tax-free cash lump sum: Once you’ve retired, you can withdraw part of your pension savings as a tax-free lump sum. By making AVCs, you can get the most out of this lump sum, receiving a larger upfront amount without tax deductions.

• AVC contributions can be changed: Unlike some pension schemes, you are free to adjust how much you contribute towards your AVC pension based on your financial situation.

• Catch up on retirement savings: If you started saving for retirement later in your career, an AVC pension can help you catch up. This way, you can potentially increase your lump sum to match those with longer service, and you might even be able to consider early retirement.

• Enhanced retirement benefits: By increasing your overall pension fund with AVCs, you can enjoy enhanced retirement benefits. This can provide you with enough income not just to get by, but to really enjoy your later life.

While AVC pensions can be a tax-efficient way of boosting your retirement fund, they aren’t suitable for everyone, and there are some drawbacks worth considering:

• Investment risk: Your AVC pension fund’s value can fluctuate, potentially decreasing in the short term due to market changes. That’s why they’re generally meant for the long term.

• Long-term commitment: By investing in AVCs, you are tying up more of your funds for later years, which means you have less money available for immediate access.

• Suitability for low income earners: Those with lower incomes may not benefit as much from AVC tax relief compared to higher earners.

To work out whether AVCs are suitable for you, you could start by using an online tool like a pension calculator to see what benefits you are currently on track to receive on retirement. If these are lower than you’d hoped, an AVC pension might help to bridge the gap. However, it can be worth discussing your calculations and entitlements with a financial advisor.

Alternatively, if you prefer shorter-term savings with predictable interest, you might consider fixed term deposit accounts. Explore market-leading rates at Raisin Bank today!

Yes, if you leave your job, there are various options for your AVC pension fund. You can leave it invested until you retire or transfer it to your new employer’s pension scheme. Alternatively, you can move it into a Personal Retirement Bond (PRB), which acts like a personal pension policy. For guidance on what you should do, it can help to refer to the rules of your AVC scheme when it comes to transfers.

Once you reach retirement, you might want to withdraw some or all of it as a tax-free cash lump sum. Under AVC drawdown rules in Ireland, you can typically take up to 25% of your total AVC pension fund as a tax-free lump sum. However, the exact amount can vary based on a few factors, including the rules of your specific AVC scheme and Revenue limits. 

Other options include placing your pension fund in an ARF (Approved Retirement Fund) for future needs, or purchasing an annuity. An annuity can provide some degree of security in retirement, as you will receive a regular income throughout your later years. 

What you decide to do with your AVC pension will ultimately depend on your financial needs and preferences. It can help to contact a pensions advisor or financial advisor to discuss your options.

Looking to get more from your AVC pension savings? Take a look at our savings marketplace at Raisin Bank, where you can compare savings accounts from across Europe. Simply register for a free Raisin Account, open a savings account, deposit your funds, and watch your money grow! Register now with Raisin Bank and get a headstart on your retirement planning.