Pension jargon can be baffling. PRSA, ARF, AVC – it is easy to nod along in conversation without knowing what any of it means.
Yet understanding one of these terms in particular could make a real difference to how comfortable your retirement turns out to be.
An AVC, or Additional Voluntary Contribution, is simply extra money paid into a pension on top of the standard contributions already being made by an employee and their employer. It is entirely optional and the amount contributed is a personal choice, within limits set by Revenue.
For anyone enrolled in a workplace pension scheme, the logic is straightforward. A larger pension pot creates more options later in life, from an earlier retirement to a bigger tax-free lump sum or simply a more comfortable income. Workers who feel they are behind on their retirement savings often find AVCs one of the quickest ways to catch up.
There are two main routes for making these payments. Contributions can be added directly to an existing workplace scheme or a separate AVC arrangement, such as an AVC PRSA can be set up independently, which may open access to a broader choice of investment funds.
Employers are not generally required to match voluntary top-ups, so it is worth checking directly with an employer or scheme administrator on that point.
The real appeal, however, lies in the tax treatment. AVCs qualify for income tax relief at a saver’s marginal rate, meaning a higher-rate taxpayer could see €100 contributed cost as little as €60 out of pocket once relief is applied.
That relief is not unlimited. Revenue caps the percentage of earnings that qualify, rising with age from 15 per cent for those under 30 up to 40 per cent for those aged 60 and over, calculated on earnings up to €115,000 a year.
Contributions above that threshold in a given year will not attract relief, so it pays to know the relevant limit before committing extra money.
At retirement, funds built up through AVCs are treated the same as the rest of a pension pot, whether that is drawn down as a lump sum, moved into an Approved Retirement Fund, or used to purchase an annuity.
Given the complexity of age bands, earnings caps and the choice between scheme types, financial advisers consistently recommend getting professional guidance before making significant AVC decisions.
A short consultation can clarify how much a person can contribute tax-efficiently and whether topping up an existing scheme or opening a separate arrangement makes more sense for their circumstances.
With pension rules changing regularly, that advice is increasingly seen as time well spent rather than an optional extra.
Lisa Doherty, CFP BBS QFA RPA SIA is a CERTIFIED FINANCIAL PLANNER. You can contact her through John F. Loughrey Financial Services ta Fairstone by telephone on 074-9124002
or by email on [email protected]