Additional Voluntary Contributions
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WHAT IS AN AVC?
An AVC is an Additional Voluntary Contribution that you can make in addition to your normal contributions to an occupational /company /employer pension scheme in the public or private sector to increase your retirement benefits.
The main purpose of AVCs is to bump up your pension benefits that your employer’s pension scheme is providing for you.
Please see the infographic of how company or occupational pensions work.
If you are a member of a company or occupational pension scheme, both you and your employer usually contribute into your pension fund.
AVCs, on the other hand, are voluntary. This means it is usually only the employee who contributes into this additional pot of pension money.
These additional contributions can still qualify for tax relief at your marginal rate of tax (subject to Revenue limits).
Access to your AVC pension pot is restricted to the access and drawdown rules of your main employer pension scheme. This is usually between age 60 and 65.
DO YOU NEED AN AVC?
AVCs can be a very beneficial way of saving for retirement. However, if you are thinking of starting an AVC, it is important to do some number crunching first to assess the real tax benefits of your contributions.
All AVC contributions can qualify for tax relief at your marginal rate of tax. However, some employees, especially civil servants or members of Defined Benefit Pension schemes, may face a tax bill on these funds at retirement.
For example, if a member of a Defined Benefit Pension scheme is overfunded in their AVC, their fund may be liable to a 52% tax charge on retirement.
Alternatively, if the same employee has a tax-free lump sum shortfall, they may pay no tax on their AVC pension pot when drawing it down at retirement.
This is why it is important to do proper financial planning before deciding whether to start, stop, or restart your AVC.
In many cases, there may be no real tax relief or benefit from paying into an AVC compared with a Regular Savings Plan. A comparison of AVCs versus savings is explained below.
AVC Vs Regular Saving Plan
Example 1
The info-graphic below compares an employee on a marginal rate of tax and the difference between contributing €100 of his Gross (pre-tax) wages into an AVC vs a Savings plan.
As you can see from above, the AVC contributions are made on the employee’s gross (pre-income tax) earnings of €100 as compared to his net income (post-income tax) of €60 with a savings plan. (Please note the above example ignores charges).
The extra €40 that goes into your AVC due to the relevant tax reliefs can have a hugely positive impact on your fund over a long period of time.
The infographics below compare an employee, who is in the 40% income tax bracket, contributing the same gross wages (€100) to both an AVC and a Savings Plan on a weekly basis over a 5-year period.
Savings IN 5-Year period
Example 2
As John’s contributions into his savings is (post-income tax), his contributions are only €60 per week.
AVC And Saving
Example 3
The table below shows a summary of the differences between an AVC and Savings.
Public Sector AVC
If you are a public sector employee, AVCs are a very popular form of savings. Please click on the button below which goes into more detail about Public Sector AVCs.
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