The financial services industry loves acronyms! This one means Additional Voluntary Contribution Personal Retirement Savings Account – referred to as an AVC for short. Whatever about the awkward name, it is a way to increase your pension contributions outside of your company pension scheme.
Why would you want to do this?
You might wish to set up an AVC if you have excess cash as it can be a tax-efficient way to invest for your retirement provided you have not already reached your age-related tax-relief limits – essentially the government gives you tax relief at whatever rate of income tax applies to you, on pension and AVC contributions up to certain annual limits (in the table below). As you get closer to retirement, the tax-relief is more generous, to encourage you to make adequate provision for your retirement.
Another reason to start an AVC could be that your existing pension is not enough to cover the lifestyle that you hope to have in retirement. This could be the case if you were late starting a pension or took a period of time out to raise a family, for example.
If you’re a civil servant and you hope to retire early, you could use an AVC to buy back years from the civil service pension so facilitate your early retirement. Another reason for opening an AVC as a civil servant is to maximise your tax-free lump sum on retirement.
The AVC PRSA is linked to your main pension scheme so that it matures at the same time.
Why would you start an AVC rather than simply contributing more to your company pension scheme?
With a company pension scheme, you may be restricted in terms of how much you can contribute. This can be the case where your employer is also making a contribution. In this case, you would have to start an AVC to be able to increase your pension investment.
More control over the fund
With an AVC PRSA, you have control over the funds in a way that you do not under a company pension scheme (and even a company AVC). This is because the PRSA is owned by the client – you – rather than trustees, therefore you can decide how it is invested. Some company schemes will give you some choice over your fund choice, but you have more options with an AVC outside the company pension scheme.
For example, if there were funds with a particular Life company you liked, you could take your AVC out with this company, as long as those funds were available for PRSAs.
It should be noted that some company pension schemes allow you to contribute to an AVC scheme as part of the pension scheme but bear in mind that as it is controlled by trustees you may have limits on the fund choice.
You can back-date for the previous year so if you decided now to make a €15k contribution per annum you can pay in €15k this year and €15k for last year provided that it’s paid by the end of the tax year (end of October–mid November).
This is useful if you haven’t used up your full age-related percentage limit in the previous year (again, see table).
Age-Related Percentage Limit:
Tax relief is given on pension contributions up to certain age-related limits shown on the table below:
|Age||Percentage of Earnings You Can Contribute Tax-free|
|30 to 39||20%|
|40 to 49||25%|
|50 to 54||30%|
|55 to 59||35%|
|60 and over||40%|
Cap on Salary:
Tax relief is limited to earnings of €115,000 (set in 2011). For example, an individual aged 38 has earnings of €200,000. The maximum pension contribution they can pay and receive income tax relief on is €23,000. (20% of €115,000, not €200,000).
Just a note
If your main pension scheme with your employer is a group PRSA (a company pension scheme where the employees own the assets, rather than the pension trustees) and your employer is contributing also, then the employer contributions must be added to your contributions for tax relief limits. See example 1 below.
Example 1: Tax relief for an employee, contributing to a group PRSA, and an AVC PRSA
Micheál works in administration for a haulage company. He is 41 and has earnings of €60,000 per annum. Micheál pays 5% (€3,000) per annum of his salary into the group PRSA and his employer pays 5% (€3,000) per annum also. At 41, he can pay 25% of his salary into a pension and as he pays into a group PRSA the employer contributions are included in this tax relief limit – he is therefore considered to be already paying 10% of his salary into his pension.
Micháel’s wife doesn’t have a pension so he is keen to maximise his savings in a pension. He decides to set up an AVC PRSA. He can pay up to 15% (25%-10%) of his salary per annum into it and still get tax relief. This would amount to €9,000 per annum. He can claim tax relief of €3,600 per annum on the AVC premiums (40% X €9,000) as he is on the Higher Rate Tax Band. He would be receiving tax relief on his contributions to his group PRSA of €1,200 per annum (40% X €3,000).
He therefore saves €3,600 per annum by contributing €9,000 so it is a net contribution of €3,400.
Example 2: Tax relief for an employee contributing to a company/occupational pension scheme and an AVC PRSA
Aisling works in IT for an investment company. She is 36 and has earnings of €40,000 per annum. Aisling pays 5% (€2,000) per annum of her salary into the company pension scheme and her employer pays 5% (€2,000) per annum also. At 36, she can get tax relief on 20% of her salary by paying into a pension and as she pays into a company pension scheme the employer contributions are not included in this tax relief limit. Therefore, she can set up an AVC PRSA and pay in 15% (20%-5%) per annum into it. This would amount to €6,000 per annum or €500 per month. She can claim tax relief on the AVC PRSA premiums of €2,400 per annum (40% X €6,000) as she is on the Higher Rate Tax Band. She would be receiving tax relief on her contributions to her company pension scheme of €800 per annum (40% X €2,000).
It sounds complicated but it isn’t really. Essentially an AVC PRSA is a great way to invest for your retirement in a tax-efficient way and offers several advantages over upping your contributions to your company pension scheme, including more control over fund choice. If you have any questions, don’t hesitate to get in touch with me.
Marcus is a Certified Financial Planner® (CFP) and Qualified Financial Advisor (QFA) with over 10 years’ experience in Financial Services. He received a B.Sc. (Hons) in Applied Mathematics from Maynooth University in 2007 and completed the QFA in 2009. Marcus went on to obtain the diploma in Retirement Planning Advice (RPA) in 2013. In 2017, Marcus received a 1st Class Honours in the Graduate Diploma in Financial Planning and passed the CFP® (Certified Financial Planner) exam. He has gained valuable experience in New Ireland Assurance and Zurich Life. Marcus joined Clear Financial in July 2017.
Warning: The value of your investment may go down as well as up. You may get back less than you invest.
MB Planning Ltd. T/A Clear Financial is regulated by the Central Bank of Ireland.