Like many people, I didn’t know much about my pension. I learned that a lot of people don’t actually look into their pension until its too late to make a very significant difference, but also you lose out on up 20 or 30 years of compounding interest that could have been had in that time.
So when I finally looked into it, I realised that my monthly contributions to a retirement fund are quite low, and add up to very little when you consider it has been compounding for 35/40 years. Essentially I will get a pension of about €19,472 made up of the state pension of €12,695 and my own contributions which only increase the pension by €6,777 a year, which seems like a small amount.
So I pay €292.63/month for 40 years, and receive €6,777 per year, which comes down to €564.75 each month. OK so not that bad, I get back about twice the amount I put in each month, and hopefully I’ll avail of that for 20 years so I’ll break even. That put me at a ripe old age of 90….so fingers crossed!!
If we add in the state pension, the monthly income increases to €1,622/month. It is a little below the amount I want to live on each month.
But what else can I do?
Additional Voluntary Contributions are the answer!
These are a contribution to your pension scheme (in my case the single state pension) through an insurance company or specialist pension provider. The final amount available at retirement depends on your contributions and the investment returns on these contributions less charges.
AVCs are only permitted if the rules of the particular scheme permit AVCs to be made. If the rules do not permit AVCs to be made then a Standard Personal Retirement Savings Account (PRSA) must be offered by your employer for the purpose of making AVCs.
AVCs are a way of increasing your 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.
- Some of your earnings, such as overtime, 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 (Such as me!!)
You can also pay AVCs to boost the value of your pension fund.
The great thing with AVCs is that you decide the level of AVC you want to pay (within the revenues limits). Your AVCs are invested in investment funds, which usually invest in a mix of shares, bonds, property and cash. Most companies will get to choose exactly which fund your AVCs go into, depending on where you are in life.
What can you do with AVCs?
There are a number of benefit options at retirement, depending on the individual circumstances of each member and Revenue restrictions:
- Immediate cash lump sum
- Purchase an annuity, to provide an income for life
- Transfer the fund to an Approved Retirement Fund (ARF) or Approved Minimum Retirement Fund (AMRF)
- Increase the tax-free lump sum on retirement, or put the AVC pension fund towards their tax-free lump sum and avoid reducing other annual pension benefits.
- Provide or increase dependent’s pension.
What are the AVC limits?
AVC pension contributions that you make while working are treated the same as normal pension contributions for tax purposes, so you may qualify for tax relief at your highest rate of tax (This is the free money!!).
|If you pay tax at 40%||If you pay tax at 20%|
|€100||Total investment to your pension||€100|
|– €40||Less tax saved||– €20|
|€ 60||Net Cost to you||€ 80|
Any growth on your AVC pension fund investment funds is also tax free (when capital gains tax is 33%, any tax relief is an absolute DREAM!!!).
The Revenue has put limits on the amount you can contribute each year. A maximum earnings limit* also applies.
|Age||Maximum % of taxable earnings allowable for tax relief on your pension contributions|
|60 and over||40%|
*Note: The maximum earnings limit for tax relief on pension contributions for 2016 was €115,000.
There are now maximum fund thresholds in place. A fund threshold is the maximum fund that a person is permitted to have for providing retirement benefits. If your fund is greater than the threshold then that excess is subject to tax. The maximum fund threshold is €2.0 Million Euro.
Well there you have it, AVCs are a great way to increase your retirement fund and overall Net Worth.