Additional Voluntary Contributions (AVCs) are a way to make additional contributions towards your retirement benefits when you are already paying into a pension scheme. AVCs can be a tax-efficient way to top up your pension. When you retire, the funds invested in your AVC can be used to bolster your pension benefits, subject to Revenue rules. Public Sector AVCs are very popular especially with members of the teaching and healthcare profession.
Why you may need an AVC?
The maximum pension someone in the public sector can receive is 50% of their gross salary at retirement, this is based off 40 years of pensionable service and working until your contracted retirement age. This can be significantly lower if employees opt to retire early under cost-neutral early retirement, entered the scheme later in life, or worked abroad for a portion of their career. If your salary was reduced by 50% right now, would you be able to maintain your lifestyle?
When should you consider starting an AVC?
- If you want to be able to retire before you are 66 (current State Pension Age, likely to increase in future).
- Once you are in a financial position to regularly contribute to a policy.
- You want more income in retirement.
- If you want to maximise your state pension benefits.
- If you want larger tax free cash at retirement.
How do Public Sector AVCs Work?
An AVC can be set up in a number of ways, monthly direct debit, annual lump sum investments or directly from your payroll (where available). While you are contributing to an AVC policy you will receive tax relief at your marginal rates up to 40%.
Why choose AVCs over a regular savings account?
- Tax Relief. Assuming you pay 40% tax, it will only cost you €60 to save €100 into your AVC. A portion of your AVC might be withdrawn tax free while the balance is subject to income tax to potentially the maximum tax you will pay on withdrawal is 20% income tax plus USC plus PRSI while you are receiving 40% relief on all contributions. An AVC also allows you to maximise the tax-free lump sum you receive at retirement. With tax relief and investment growth, it is quite easy to double the amount you invest.
- When retiring, you can choose the pension benefits that you want. These include, tax free lump sum, approved retirement fund, taxable cash, or annuity.
- You have full control over how much to invest. It’s your AVC, so you can increase, decrease, stop, or restart your AVC contributions at any time. This means as life events occur, your priorities may change; so too can your investment, ensuring financial security when you retire.
- Provides you with the option of early retirement. An AVC can help you to retire early providing you with additional income of up to 2/3s of your final salary as well as an initial lump sum of up to 1 and 1/2 times your final salary.
- Tax free growth. Investment returns earned by pension schemes are also exempt from capital gains, exit tax and dividend income tax and the lump sum you can take at retirement is tax-free up to certain limits.
How can you use your AVC?
Well, that depends on your circumstances.
If you have built up your AVC with Cornmarket, it can stay or move. Whether or not you choose to stay or move, you still have several options to choose from when it comes to using your AVC.
- You can use your AVC to top up your tax-free lump sum, whether you have long or short service years.
- You can also use your AVC to purchase additional years of service. This can be done in a few different ways including notional service, spouse and children buyback and programme for competitiveness and work.
- Your money can be put into an approved retirement fund, this gives you a more flexible lifestyle and enables you to withdraw your money as you require it.
- Qualify for Irish Contributory state pension benefit.
- Guaranteed pension for life – Annuity.
Public Sector pensions are our forte here at MadeSimple. We understand the public sector better than anyone else and have been working with public sector employees across the country for years helping them achieve their retirement goals. Would you like to start an AVC today? Take the first steps toward your goals and fill out our financial report today.