AVC Pensions in Ireland: How They Work (+ Benefits & FAQs)

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

In Ireland, AVCs give 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.  

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.

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

Important: As AVCs are defined contribution schemes, they are subject to investment risks and market volatility. Consult your financial advisor before making any investment decisions. 

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 employees enrolled in company pension schemes, but self-employed people can also make additional contributions similarly.  

To make AVCs, you must:

• Inform your payroll department. 

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

The payroll department will then arrange for your AVCs to be deducted immediately from your paycheck and deposited into your pension plan. They will also assess and apply any tax breaks you’re entitled to. 

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

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

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

To claim tax relief on once-off payments, the 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 the employee will get tax relief. 

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

What Are the Benefits of AVCs?

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

By making AVCs, employees can:

1. Get Tax Relief

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

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

Moreover, Irish 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 you can claim tax relief on. For instance, if you’re over 60, you can claim tax relief up to 40% of your gross income.  

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

Read more about Tax Relief on Irish Pension Contributions. 

2. Have Complete Control Over Contributions

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.

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 the employee leaves the 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 take early retirement — which usually means retiring before you’re 65 years old 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 to Make an AVC in Ireland?

Follow these four steps to make an AVC:

Step 1: Check Your Tax Relief Eligibility

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

To be eligible, you must ensure your expected extra contribution amount falls within the tax contribution limit (€115,000 per year as of April 2024). 

Check your eligibility by: 

• Manually cross-checking your age-related percentage limits
  
  OR

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

Step 2: Make Your Payment 

Employees must obtain and fill out an Additional Voluntary Contributions application form from their financial advisor or pension provider to make AVC payments. 

Employees who wish to make a lump sum payment can either: 

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

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

Step 3: Collect Your Tax Certificate 

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

The 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 Your 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 the employee's tax credits, and the employees will receive their income tax relief within a few weeks.

How Can Irish Employees Claim Their AVC?

Several retirement options are available for 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.

2 FAQs About AVCs in Ireland

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

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

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

A preserved benefit involves maintaining the employee’s benefit fund after they leave service or their employer terminates them. Employees not qualifying for a preserved pension benefit can withdraw their pension benefits in cash or transfer them to another scheme. 

Here’s how this works: 

• If an 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 the 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. 

• Employees who wish to transfer their AVCs 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 AVC Contributions Invested in Ireland?

Pension providers invest AVCs in funds like shares and stocks. 

The aim is to ensure that the 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 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.

• Use our benchmarking to offer competitive employee pension packages. 

• 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?