Why should we pay Additional Voluntary Contributions (AVCs) if we are already paying into our pension anyway? The most obvious reason is to provide a higher level of retirement benefits … the more you put in the more you get out.
For people working today and trying to provide for their retirement you need to face the possibility that there might not be as high a level of State Pension available for you when you retire or, indeed, there might not be any State Pension at all.
You also need to consider what income you will have between the age that you stop working and the age that you will receive any State Pension. State Pension is currently payable (where applicable) at age 66, however, this age increases to 67 from 2021 and 68 from 2028. Who is to say that this age might not increase again between now and your date of retirement? If you retire at age 65 will you have sufficient income from your pension arrangement to provide you with a decent standard of living until you become eligible to receive the State Pension?
The other big incentive to pay AVCs is to avail of Tax Relief. Tax Relief is given at your marginal tax rate. There is no relief available in respect of PRSI and the Universal Social Charge.
Current tax relief available.
As to whether you pay AVCs on a regular basis or as a lump sum really depends on your circumstances. If you are a PAYE employee and a member of an occupational pension scheme, or have a PRSA, that you contribute to by means of salary deduction via payroll then you will receive your tax relief at source. Therefore a regular AVC payment would probably suit you best.
However if you have other sources of income that necessitates a manual tax return each year then you may wish to pay an AVC prior to the end of each tax year to reduce your tax bill. You can make an AVC prior to the 31 October (or later if you complete your tax return online – i.e. 14 November in 2018) each year and claim tax relief for the previous year. This will not only reduce your tax bill for the previous year but also your provisional tax bill for the following year.
Let’s imagine you have a tax bill of €10,000 to pay for 2017 and preliminary tax of €10,000 for 2018 by 31 October 2018. You could write a cheque to Revenue for €20,000 and job done.
Imagine instead, you pay an AVC of €5,000 to your pension. This will have the effect of reducing last year’s tax bill by 40% of that €5,000 (i.e. €2,000). As preliminary tax is 100% of last year’s bill, you also reduce the preliminary tax by the same amount (i.e. €2,000).
So you have a choice – you can pay Revenue €20,000 or you can put €5,000 in your pension and pay Revenue €16,000 (i.e. €20,000 – €2,000 – €2,000). Your total spend is only €1,000 more but for that extra €1,000 you pay Revenue the amount due and also have €5,000 in your pension fund – it’s a win win situation!
Another factor to consider when deciding if a regular or lump sum AVC would suit you best is how it might grow over time. Like any investment the returns you will achieve can depend largely on timing. By making a regular AVC you are hedging your bets by spreading your payments out over time. However, by making a lump sum contribution you will be investing your money at a particular moment in time and if there is a subsequent drop in the markets then you could see an initial loss on your investment until such time as markets recover.
As you are aware, investment returns are not guaranteed and can increase or decrease in the future. We always recommend that you take independent investment advice when considering your investment choices for your AVCs and all your major financial decisions.
In conclusion it would appear to be quite obvious that it is a good idea to make AVCs to your pension arrangement and the only question is how you want to do it!
If you have any queries in relation to this, or any other pension related issue, please do not hesitate to contact your usual CPAS contact.