Employees
Company Pension Schemes
Company pension schemes are provided by most employers for the benefit of their employees. Where employees contribute to such schemes tax relief will be allowed through the PAYE system at source by the employer. The amount contributed by the employee is deducted from their gross pay before tax is deducted. This ensures that the employee receives their tax relief without having to claim the benefit of the relief from the tax office. Generally speaking the amount of contribution by employees will be less than the amount which could be paid by them for maximum tax relief purposes. This has given rise to employees making additional pension contributions, which are commonly referred to as AVCs.
Additional Voluntary Contributions (AVCs)
These payments are subject to the same percentage and income limits as already explained for self employed pension contributions i.e. a maximum percentage allowable based on age and an income ceiling on the amount for which tax relief can be claimed. These limits are applied after taking into account any contributions already made by the employee to a company pension scheme, any employer and employee contributions to PRSAs and any personal pension payments made by the employee for the tax year in question.
The use of AVCs is particularly important for employees coming near pension age and is a useful tool for tax planning for retirement purposes. There are different options at retirement as to how the value of your AVC fund is dealt with, which with careful planning can ensure substantial tax relief and an improved pension position at date of retirement.
At retirement the value of the AVC fund may be transferred to an approved retirement fund account, which means the funds remain under the control of the employee. Alternatively the value of the AVCs can be used to increase your general pension fund and the level of pension available at retirement.
Normally you can arrange with your employer for the payment of AVCs through your payroll system, which means you will benefit from a reduction in both Income Tax and PRSI. AVC payments may be made during the tax year for tax relief in that particular year. As with individuals who are either self-employed or in non-pensionable employment there is a backdating facility to the preceding tax year. This allows you reclaim tax paid in the previous tax year e.g. AVC payment made in tax year 2016 and tax relief claimed for the payment in tax year 2015.
Use of AVC’S When Retiring
If you are due to retire within the next few years you should examine the use of AVCs to take maximum advantage of the tax relief due. This can help increase your future pension benefits at a relatively low cost as shown in the example below;
Assumptions
| Year | Earnings € |
| 2016 |
80,000 |
| 2017 |
90,000 |
| 2018 |
100,000 |
- Retiring on 31st December 2018 at age 65.
- Entitled to AVC tax relief on 40% of earnings
Recommendation:
Make maximum AVC pension payments for each tax year.
Tax Relief:
| Tax Year | AVC Payment € |
Tax Relief € |
Net Cost € |
| 2016 |
32,000 |
12,800 |
19,200 |
| 2017 |
36,000 |
14,400 |
21,600 |
| 2018 |
40,000 |
16,000 |
24,000 |
| Total |
108,000 |
43,200 |
64,800 |
Result:
| Estimated Value of AVC fund | €110,000 |
| At a Cost of | €64,800 |
For an after tax cost of €64,800 the individual concerned has an AVC pension fund worth an estimated €110,000. The AVC fund would be in addition to whatever benefits the employee is entitled to under the company pension plan. However unlike the company pension scheme the employee can take direct control over the future investment of the AVC fund. In the event of the death of the employee the remaining value of the AVC fund will then pass to their family.
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