AVC Pensions in Ireland: How They Work, Benefits For Your Team

Additional Voluntary Contributions (AVC) are extra money your employees contribute to an occupational pension scheme in addition to their normal contributions. 

In Ireland, AVCs give your employees:

• Tax relief on contributions.

• The flexibility to change or stop contributions at any time.

• The option to retire early.

We’ll explore how AVCs work in Ireland and answer common questions about them. 

What Are Additional Voluntary Contributions?

Additional Voluntary Contributions are defined contribution pension arrangements offered by insurance companies or pension providers in Ireland. They allow the pension policyholder to contribute more than the minimum amount set out on their plan to enjoy more benefits at retirement.  

Your employees can choose the rate at which they wish to make these additional contributions and claim tax relief, both of which are subject to Revenue limits.

Your employee’s total entitlement at retirement is determined by combining their regular contributions, AVCs, and investment returns.

How Does an AVC Work in Ireland?

In Ireland, members of occupational pension schemes or superannuation schemes (offered to civil and public servants) can make AVCs only if their scheme permits.

AVCs are primarily aimed at your employees enrolled in company pension schemes. But if you’re a self-employed person, you can also make additional contributions similarly.  

To make AVCs, your employees must:

• Inform your company’s payroll department. 

• Fill out an application form provided by their financial advisors or pension providers. 

The payroll department must then arrange for your employees’ AVCs to be deducted immediately from their paycheck and deposited into their pension plan. 

They must also assess and apply any tax breaks your employees are entitled to. 

(We’ll discuss the above steps in more detail under ‘How can employees make an AVC in Ireland’.) 

Another way to make AVCs is through a once-off lump sum payment. 

Revenue has capped the lump sum your employees can contribute to top up their AVC fund at €200,000. 

To claim tax relief on once-off payments, your employee must apply to the Inspector of Taxes by 31st October each year. 

But look:

Sending an application for tax relief doesn’t guarantee that your employee will get tax relief. 

The decision is entirely at the discretion of the Inspector of Taxes. 

When an employee makes AVCs through your payroll system, any tax relief available to them is applied automatically, and they don’t have to apply to the Inspector of Taxes or Revenue Commissioners for a tax refund.

What Benefits Do AVCs Offer Your Employees?

AVCs are a flexible and tax-efficient way for private and public sector Irish employees to save additional money for retirement.

By making AVCs, your employees can:

1. Get Tax Relief

AVCs are treated similarly to USC (Universal Social Charge) and PRSI (Pay Related Social Insurance) contributions. 

So your employees can avail of tax relief at their highest marginal tax rate. 

What’s the marginal tax rate?

Ireland has two tax rate bands:

• The standard tax rate of 20%.

• The high marginal tax rate of 40%. 

The highest marginal tax rate of 40% is charged on any income above the standard rate band of 20%. Anyone paying tax at a marginal rate of 40% can claim tax relief at that rate, while others can claim tax relief at 20%.

For example, if your employee contributes €120 to their AVC and pays tax at a marginal rate of 40%, they can claim a tax refund of €48.

Moreover, your employees can only claim tax relief on AVCs at the source of income from which they made their pension contributions. 

Revenue’s Limits for Tax Relief on AVCs in Ireland

Tax relief on AVCs is subject to two limits: 

• Age-related Percentage Limit: This defines the maximum percentage of gross income your employees can claim tax relief on. For instance, if your employee is over 60, they can claim tax relief up to 40% of their gross income.  

• Total Earnings Limit: The maximum amount of earnings used to calculate tax relief is €115,000 annually. For example, if your employee is over 60 and has contributions close to or more than €115,000, they can only make €46,000 (€115,000 x 40%) tax-free contributions in a tax year.    

Read more about how your employees can get Tax Relief on their Irish Pension Contributions. 

2. Have Complete Control Over Their Contributions

Your employees have complete control over their AVCs. 

They can increase, decrease, or stop their contributions any time they want or even make lump sum contributions.

Your employees can also control their AVCs post-retirement by adding funds to an ARF (Approved Retirement Fund). They can invest their pension fund in an ARF after receiving it as a lump sum payment instead of purchasing an annuity.  

Moreover, if an employee leaves your company, they can preserve their benefits or transfer them to the pension fund offered by their new employer.   

3. Retire Early

Employees who make AVCs can have a large pension pot, allowing them to retire early — which usually means retiring before they’re 65 in Ireland. 

How does it work?

An AVC pension can help early retirees (those who retire after 50) by providing additional income equal to up to two-thirds of their final salary. 

Retiring employees can also claim a tax-free lump sum of up to 1.5 times their final salary if they meet certain conditions relating to their years of service.

How Can Employees Make an AVC in Ireland?

Here are the steps your employees can take to make an AVC:

Step 1: Check Their Tax Relief Eligibility

Your employees must ensure they are entitled to tax relief on pension contributions they want to pay. 

To be eligible, your employee must ensure their expected extra contribution amount falls within the tax contribution limit (€115,000 per year as of January 2025). 

Your employees can check their eligibility by: 

• Manually cross-checking their age-related percentage limits, or

• Asking a financial advisor to do the calculation for them. 

Step 2: Make Their Payment 

To make AVC payments, your employees must complete an Additional Voluntary Contributions application form from their financial advisor or pension provider. 

If your employees wish to make a lump sum payment, they can either: 

• Write a cheque for the amount payable to their plan provider, or

• Pay the money into their pension provider's bank account by Electronic Funds Transfer (EFT).

Step 3: Collect Their Tax Certificate 

Once the pension provider receives your employee’s payment and completed application form, they will send them a tax certificate within ten working days.

Your employees must keep this tax certificate in their records because it proves they are making AVCs and are entitled to tax relief. 

Step 4: Make Their Tax Relief Claim  

PAYE (Pay As You Earn) employees can fill out their details: 

• On the Revenue Online Service (ROS) website (www.revenue.ie/en/online-services/index.aspx), or

• Mail their income tax forms to their local Revenue office to claim tax relief.

Revenue will then modify your employee's tax credits, and they will receive their income tax relief within a few weeks.

How Can Employees Claim Their AVCs in Ireland?

Several retirement options are available for your employees to claim their AVCs. 

These include:

• Collecting immediate cash lump sums.

• Purchasing an annuity to receive a lifetime retirement income.

• Transferring the pension fund to an ARF (Approved Retirement Fund). 

• Increasing the tax-free lump sum amount upon retirement or putting the AVC towards a tax-free lump sum to avoid reducing the benefits of other annual pensions.

• Providing or increasing pension savings for dependents.

What Is an Employer’s Role in Facilitating AVCs for Their Employees?

As an employer, your role in managing Additional Voluntary Contributions (AVCs) is to ensure employees can easily contribute to their pension while complying with regulations. 

Your key responsibilities include:

1. Educating Employees About AVCs

Many employees may be unaware of AVCs, their benefits, or how to contribute. As an employer, you should:

• Provide employees with clear information about AVCs, including their tax benefits and retirement advantages.

• Direct employees to pension providers or financial advisors for personalised guidance.

• Offer informational sessions or resources explaining how AVCs work.

2. Setting Up and Managing Payroll Deductions

Once an employee decides to make AVCs, they will typically contribute through payroll deductions. Your payroll team must:

• Deduct AVC contributions from employees’ salaries as per their instructions.

• Apply tax relief at source so employees receive immediate benefits.

• Keep accurate records of AVC contributions for compliance and reporting.

• Ensure contributions do not exceed Revenue’s limits for tax relief eligibility.

3. Coordinating With Pension Providers

You often act as intermediaries between your employees and their pension providers. As a result, you should:

• Ensure AVCs are correctly allocated to employees’ pension schemes.

• Communicate with pension providers to resolve any administrative issues.

• Verify that employees’ contributions align with Revenue’s regulations.

4. Managing AVCs When Employees Leave

If an employee leaves your company, their AVCs must be managed properly. You should:

• Inform them of their options, such as transferring AVCs to a new employer’s scheme or a Personal Retirement Savings Account (PRSA).

• Ensure they receive the necessary paperwork for pension portability.

• Clarify whether they qualify for a preserved benefit or can withdraw their AVCs.

2 FAQs About AVCs in Ireland

Here are answers to some frequently asked questions about Additional Voluntary Contributions: 

1. What Happens to AVCs If Your Employee Leaves Service?

When your employees leave service or end their employment with you, they can preserve, withdraw or transfer their AVCs. 

A preserved benefit requires you to maintain your employee’s benefit fund after they leave service or get terminated from employment. If your employees don’t qualify for a preserved pension benefit, they can withdraw their pension benefits in cash or transfer them to another scheme. 

Here’s how this works: 

• If your employee has been a part of the pension scheme for more than two years, they can preserve their AVC in their pension fund till they reach their retirement age. 

• If your employee has been a part of the scheme for less than two years and is not eligible for preserved retirement benefits, they can cash their AVCs equal to the value of their contributions minus any taxes deducted. 

• If your employees wish to transfer their AVCs, they can transfer their main pension scheme benefits to a new employer's scheme or an insurance company's Personal Retirement Savings Account.

2. How Are Your Employees AVC Contributions Invested in Ireland?

Pension providers invest AVCs in funds like shares and stocks. 

The aim is to ensure that your employee’s money continues to grow; this ‘growth’ is known as an investment return.

Make Retirement Easier for Your Employees With Kota 

AVC pensions can help your employees enhance their retirement benefits along with their regular DC pension scheme contributions — and even help them save more than in a standard defined benefit plan. 

If you’re an employer looking to offer a DC pension scheme that supports additional voluntary contributions, try Kota. 

With Kota, you can:

• Set up workplace pension compliantly within minutes.

• Enrol your employees into a defined contribution pension plan.

• Give employees complete control over their contributions, allowing them to match employer contributions and make changes as needed. 

• Automate pension process to reduce administrative overheads and set-up costs.

• Integrate your human resources (HR) and payroll software with Kota to create a unified system.

So why not join Kota to streamline employee pensions and AVCs in Ireland?