- AVCs are a simple and tax-efficient way of saving for your retirement. They are extra contributions made to bump up your main pension entitlements on retirement.
- All contributions to AVCs qualify for tax relief. This makes them a much more tax-efficient method of saving than a regular savings plan.
- You are in effect saving your before-tax earnings as opposed to saving your after-tax earnings (when saving into your bank account/credit union/savings or investment plan).
- AVC must be attached to an occupational/company pension scheme. They cannot be set up without the main pension scheme e.g. Public Sector Pension Schemes (HSE, Dept of Education)
- Both regular premiums and lump sums contributions can be made to AVC.
- Tax relief is deducted at source for a regular contributions, whereas tax relief for lump sum contributions are also received in a lump sum when a tax return is completed.
- All investment returns grow tax tax free each year within the AVC. The compounded effect of steady annual returns can have a hugely positive impact on your funds from now until retirement.
- You can pause, stop, restart, increase or decrease your AVC contributions at any stage.
The main purpose of AVCs are illustrated below
1. Buying back years of Service
AVCs can be used to buy back years of service and retire from you job earlier. However, this rarely makes financial sense as buying back one year of service is often too expensive to make be a viable option. For example it can cost up to €20000 to buy back 1 year of service. It can often take up to 40 years receive back the €20000 in annual pension income.
2. Maximising out your tax free lump sum shortfall
If you have a tax free lump sum shortfall, you can withdraw up to this amount tax free from your AVC. Your tax free lump shortfall is the difference between the lump sum earned from your years of service verses the maximum allowed lump sum (1.5 times Final Salary). You will usually have a shortfall.
- you have less than 40 years service completed at retirement
- if you work past your normal retirement age and have over 40 years service.
- If you earn a lot of overtime with your job e.g Doctors/Nurses/Guards, Fire Officers etc
Please note that if you have excess funds in your AVC over and above your tax free lump sum shortfall, the excess funds will be taxable as income on retirement. It is important to work you’re your shortfall before starting contributing into AVCs.
3. Increasing your Pension income using an Approved Retirement Fund after retirement.
Once you have withdrawn your tax free portion of your AVC, any excess funds is usually transferred into an Approved Retirement Fund. Once these funds are withdrawn from the ARF, they are taxable. Its always prudent to withdraw these funds tax efficiently each year to avoid paying any unnecessary income tax.
4. Reducing your tax bill on other self employed income (e.g.Rental Income/Farm/consultancy income)
Public servants or even spouses who are public servants can use AVCs to reduce any tax liability due on self employed income. As all contributions into AVCs qualify for tax relief, the tax rebate can be offset against any tax liability due by 31st of October each year. Lumps sum contributions are usually used in these circumstances. Its important to note that there is a limit on how much an individual can contribute into AVCs each year and qualify for tax relief. This limit is directly correlated to your age and Annual Gross earnings. However you can backdate unused tax relief to the previous years income.
5. Reducing your tax bill on Bonuses/commissions received during the year
If you are in receipt of bonuses or commissions from your main occupation, almost half of these payments are taken by the revenue through income tax etc. AVCs can be used to avoid paying income tax on these payments as all contributions into AVCs qualify for tax relief etc.
Access to your AVC funds are restricted to your retirement age. The funds are drawn down in line with your main public sector pension benefits.
On retirement AVC funds are access are illustrated below
A. If you have a tax free lump sum shortfall, you can withdraw up to this amount tax free from your AVC. This is directed correlated to you years of service on retirement (explained above).
B. With the excess fund you have the following options;
- You can use the excess funds to buy back years but as stated above, this is rarely advisable.
- You can withdraw the excess funds and pay tax on them. Again this is rarely advisable
- If you have above this amount in your AVC at retirement, it is recommended that these excess funds be transferred into an Approved Retirement fund (ARF). Withdrawals form this pension vehicle are received as income and are liable to income tax, USC and PRSI…..similar to any regular pension income.
- These withdrawals can be made monthly, quarterly or annually. When withdrawing funds from this ARF it is advisable to be financially prudent when choosing how much to withdraw each year in order to minimise your income tax liability.
Overfunding your AVCs
If you have excess funds over and above you tax free shortfall and will have guaranteed pension income (either from your job/state pension or other Income) which ill put you into the higher income tax threshold (40%), your AVC fund is overfunded.
This means that, although you would have got tax relief going into your AVC, you could be faced with a tax liability of up to 52% when withdrawing these AVC funds on retirement.
In these circumstances its advisable to stop any further contributions and possibly transferring your paid up AVC into a Public Sector AVC Retirement Bond. These bonds are specifically tailored for ‘paid up’ AVCs and have very low charging structure.
Its important to know if you are in danger of overfunding your AVC before you start contributing into one.
Both Regular and Lump sum contributions can be made to AVCs. All AVC contributions qualify for tax relief at your higher/marginal rate of
AVC – Regular Contributions
When regular (fortnightly/monthly) contributions are being paid into AVCs, the tax relief is also received simultaneously. Regular contributions can be made in 2 ways
- By Salary deduction -from your payslip
- Non Salary Deduction – debited from your personal bank account.
With Salary deduction method, the AVC contributions are transferred to the AVC before the income tax is subtracted. This is called getting tax relief at source.
With the Non Salary Deduction method, the Gross AVC premium is debited from your bank account each month. The tax rebate (usually 40% of the AVC premium) is added back to your take-home pay on your payslip on a monthly basis.
There is no real difference between the 2 methods. You are receiving your tax relief either way. We would always recommend the non salary deduction as it give you much more flexibility in relation to;
- Making lump sum contributions
- Choosing AVC provider
- Better fund choice
- Control over your contributions (stopping/restarting/increasing/decreasing them etc)
HOW DOES THE TAX RELIEF PROCESS WORK FOR THE NON SALARY DEDUCTION METHOD?
Once your policy goes live, the relevant insurance provider sends an AVC Certificate to the revenue to prove that your policy is now live and instructs them to alter your tax credits accordingly.
When the revenue completes this task, you will receive the relevant tax rebate back in your tax home pay monthly. You will notice an increase in your take home pay by the rebate amount once the revenue alters your tax credits.
HOW IS THE TAX RELIEF RECEIVED?
It may take 6 weeks or so after your start date before you start receiving your rebate but all tax relief due will be backdated and paid in full once your tax credits are adjusted etc. There is no action required by you to qualify for tax relief. This will all be done for you by the chosen AVC provider and your local tax office.
AVC LUMP SUM CONTRIBUTIONS
When lumps sum contributions are made, the tax relief is received in a lump sum also.
HOW DOES THE TAX RELIEF PROCESS WORK?
Your Lump sum is transferred via either into The AVC providers bank account either by
Requesting your bank to electronically transfer the funds across to the provider
Transferring the funds via Electronic transfer from your own bank online banking facility.
HOW IS THE TAX RELIEF RECEIVED?
Once received by the AVC provider, they send a certificate to the revenue as proof of this transaction.
The revenue will then issue the tax relief to the client either via bank draft in the post or transfer it into their bank account (if they have the correct details). This process can also take about 6 weeks or so.
With Lump sum contributions, it may be advisable to contact revenue via phone call 4 to 6 weeks after the funds have been transferred to instruct them to issue you with the tax relief to you with whichever method you would prefer (Post or EFT).
Alternatively, you can wait until you are doing your next tax return and apply for it at this stage.
WHERE WILL YOUR AVC FUNDS BE INVESTED?
All AVC contributions are usually invested in a Multi Asset fund with one of the AVC Providers/Insurance Companies. .
What is a Multi Asset Funds?
A Multi Asset Fund Is An Investment Put Together By An Investment Provider/insurance Company(Aviva/Zurich/Irish Life etc.). It Is Made Up By A Mixture Of 5 Asset Classes:
- Stock Or Equities (usually World Wide Multinationals E.g.,amazon, Facebook, Paypal Etc.)
- Government And Corporate Bonds(fixed Income / Returns)
- Commodities(gold/ Silver/ Oil Etc.)
- Property(usually Commercial Property Located In Numerous Countries Etc.)
- Alternative Assets(renewal Energy/solar Etc.)
- Cash(money On Deposit)
The Investment Providers Usually Have Multi-asset Funds For Low, Medium, And High-risk Investors.
Please See Below A Typical Breakdown Of The Percentage Of A Typical Low, Medium, And High-risk Fund:
Each insurance company has hundreds of different multi asset ranges of funds.
As Investment brokers, we have Agency arrangements with all of the providers namely Zurich, IrishLife, New Ireland Assurance, Aviva, Standard Life, Royal London etc.
We are an advice driven business and it is our job to search all the multi asset funds through out all the different providers and recommend the best one for you. We have no preferential arrangements with any one Provider.
We search the market place and compare multi asset funds with in your risk tolerance level and then make our recommendations to clients.
We compare funds in the following 6 areas:
- Set up fees
- Allocation rate
- Annual Management Charge of the fund.
- The fund performance over a 5 –10-year period
- Credibility and/ or Reputation of the Insurance company
- The length of time you wish to invest
We then make our recommendation to you based on the best over all deal for clients.
STEPS INVOLVED IN SETTING UP YOUR AVC
In order to set up your AVC, the following steps are required;
1- Sign and send back/submit a Zurich AVC Application form along with your Anti-Money Laundering documentation.
2- The application along with your Anti Money Laundering documents are then submitted to the chosen AVC Provider to be processed and a policy number created on their system. This can take between 2 to 4 weeks.
3- If lump sum AVC contributions are being made you will be required to either;
- go into your bank/credit union and request them to transfer your funds to AVC Provider’s bank account or
- transfer it yourself from your own personal online banking account.
You will need to reference your policy number and date of birth when transferring Once your policy goes live, the AVC provider will send your AVC policy documents in the post within a couple of weeks from the start date.
4- You will also receive a PIN code (separately) in the post which will enable you to log into the AVC providers online system. Here you can view your account balance, change fund choice, stop/pause/increase your contribution etc.
5- The AVC provider will alsosend a tax certificate to the Revenue at this stage. This document is proof that you are making AVC contributions and are now due tax relief back on same. Your tax credits will then be altered by them and the all tax relief will be received within weeks.