Adding more to your pension (AVCs)
What are AVCs?
Additional Voluntary Contributions (AVCs) are contributions you make to your employer pension scheme to build up an additional retirement fund. When you retire, this AVC fund can be used to top up your employer pension benefits, within Revenue limits. Some AVCs also offer the facility to add additional death in service benefits for dependants.
Why would you consider AVCs?
AVCs are a way of increasing your employer pension benefits if they may fall short of the maximum benefits you can get at retirement. A shortfall can arise in different ways, such as:
- You may not have the maximum 40 years service by your minimum retirement age to get the maximum benefits. If you are in the public service, you may be able to bridge this gap using notional service purchase (NSP) instead of AVCs.
- Some of your earnings, for example overtime or various allowances, may not qualify for pension benefit purposes
- If you are a public servant and you joined after 6th April 1995, your employer pension benefits are reduced to reflect your entitlement to the State Pension
You may also wish to pay AVCs to boost the value of your pension fund.
How AVCs work?
You decide the level of AVC you want to pay, within certain Revenue limits – see the Revenue site for more information. Your AVCs are invested in investment funds, which usually invest in a mix of shares, bonds, property and cash. The value of your AVCs can rise and fall in line with the values of investment funds your money is invested in. You are not guaranteed any specific level of AVC fund or retirement benefits by retirement age. At retirement, your AVC fund is used to top up your retirement benefits. You can decide how to use the fund, within certain restrictions.
You can use your AVC fund to top up your tax-free lump sum to the maximum level allowed by Revenue. You may be able to transfer any balance to an Approved Retirement Fund (ARF), which you can draw on in retirement, or use to buy an annuity. Any balance in your ARF on death in retirement is payable to your dependants. You should check with the Revenue if your AVCs qualify for income tax relief, within limits.
For example, John works in the private sector. He finds out that he is entitled to take €36,000 as a maximum tax-free lump sum at retirement from his employer’s scheme. He has also built up an AVC fund worth €50,000. John decides to use €36,000 of his AVC fund to take his tax-free lump sum. This leaves him with €14,000 that he could use to:
- Buy an annuity and get an extra pension income from his employer’s scheme
- Invest in an ARF
- Take as a lump sum (that he will pay income tax on)
Where can you get more information on AVCs?
Ask your HR department, pension administrator or your union about AVCs. Many public service unions have specific AVC schemes for their members. Your employer may provide AVC facilities by:
- Setting up an AVC fund, either as part of the employer’s main pension scheme or as a separate AVC plan
- Arranging a Personal Retirement Savings Account (PRSA) for employees who want to make AVCs
If there is no facility within your employer’s pension scheme for AVCs, you can set up your own independent PRSA into which you then pay the AVCs. In this case, your contributions will not be automatically deducted from your salary before tax. You will have to arrange to pay the AVCs and claim tax relief yourself. You can contact Revenue for information on how to claim tax relief.
Pensions can be complex products, so you may wish to get financial advice. Your financial advisor will discuss your options with you and recommend a product based on its suitability to your needs. Also ask your advisor about all your options including any option to avail of notional service purchase (NSP), if you work in the public service.