Who Qualifies ?
An AVC pension is a tax effective investment product designed to encourage saving for retirement. As the Irish population ages, the government has been keen to encourage people to save for their own retirement and not to rely on the state for their pension. For this reason, extensive tax incentives are given to individuals and companies who put money into pensions. To quality for the benefits on offer there are some basic rules to follow.
Who can buy an AVC?
Anyone who is already part of a company pension provided:
- You are paying in less than 15% of your salary. This includes bonuses, overtime and any benefits in kind from your employer.
- The benefits your company pension will provide at retirement are less than the maximum benefits allowed by the Revenue Commissioners.
Can my company put money into my AVC?
No. Premiums to an AVC can only be paid by you. Any money paid by your company has to be paid into your main company pension.
Does my employer need to know about my AVC?
Yes. Your employer has to sign a form to allow you to start an AVC. This is because legally an AVC is treated as part of the main company pension. However; it can only be used to provide pension benefits for you or your dependants.
To whom does my AVC belong?
Your AVC pension fund is held in trust for you. This means that neither you nor your company owns it directly. It is safeguarded by Trustees who have a legal responsibility to make sure that you receive any benefits you are due.
What happens if i leave the company in a few years?
If you leave the company any time before your normal retirement age you have a right to the total value of your AVC fund.
You have three choices as to how you use this fund. You can:
- leave it invested in the your AVC until you retire
- transfer it to the company pension of your new employer
- transfer it to a Buy Out Bond in your name. This is simply a pension bond in which you can invest your money until your normal retirement age.
Savings with a difference
How does an AVC work ?
An AVC is a form of tax efficient saving designed to help you to build up a fund of money for your retirement. When you retire you can use the fund in a number of different ways to meet your retirement needs.
Can I take my money out if I need it in the future?
No. Once you have put money into a pension plan you cannot withdraw it until you reach retirement.
Can I use my pension as security for a loan?
Pensions are non-assignable. This means that they can only be used to provide benefits for you or your dependants and cannot be signed over to anyone else. Some lenders will allow you to repay the capital part of a mortgage from your pension funds when you retire. These arrangements are often restricted to directors who have more than a 5% shareholding in the company and have more flexibility at retirement. Any agreement to use part of your retirement fund in this way must be made between you and the lender and a separate contract is required.
Can I provide extra protection for my family ?
Most AVC's allow you to add life cover to your pension. This extra cover also receives tax relief and is a sensible and cost effective way of providing extra security for your family.
Money from the Taxman
How does the tax relief on an AVC work ?
Tax relief reduces the real cost of your pension premiums. Any qualifying money which is paid into a pension is not taxed. You can save income tax and PRSI on any premiums you pay.
How should I pay my premiums ?
The cheapest and easiest way is to have them deducted from your salary and paid straight to your pension. By using this method you do not have to pay PRSI on your premiums, saving you an extra 6.5%. Using the salary deduction method also saves your employer PRSI of 12% of your premium.
|Tax Relief on AVC's|
|Your Monthly Pension Contribution||€100.00|
|Income Tax Relief @ 44%*||€44.00|
|PRSI Relief @ 6.5%||€6.50|
|Total Net MOnthly Cost||€49.50|
|* If you pay tax at 22% rate, your tax relief will be €22 and your total net cost will be €71.50|
How much can I put into my AVC?
You can put up to 15% of your salary (including bonuses,overtime and benefit in kind) into your pension and get full tax relief on the premiums. Just remember that under the Revenue's rules your company has to be paying at least one sixth of the total premiums going into your company pension and AVC.
You must also make sure that the benefits you will get at retirement are within the limits set by the Revenue Commissioners.
What is the maximum benefit I can have at retirement ?
The maximum benefit depends on your salary and the length of time you have worked for the company. There are two ways to go about calculating your maximum benefit.
For every year you work with a company you can have a pension worth 1/60th of your final salary when you retire, up to a maximum of 40/60ths.
If you use this method, you don't have to include any other pensions you are due to receive at retirement in the calculation.
|Method 1 example|
|10 years worked in company|
|Salary at Retirement||€30,000|
|Maximum pension 10/60ths||€5,000|
If you have worked in the company for at least 5 years,you can choose to follow the scale shown.
|Method 2 scale|
|Years Worked Maximum||Pension as a fraction of Salary|
This scale allows you to have the maximum pension after only 10 years working for the company. However, if you use this scale you must include any other pensions which you will receive in the calculation.
|Method 2 example|
|10 years worked in company|
|Salary at Retirement||€30,000|
|Maximum pension 40/60ths||€20,000|
|pension from previous employment||€5,000|
|Maximum pension from current company||€15,000|
When can I retire ?
Your normal retirement age is generally set by your company and can be between 60 and 70.
From age 50 you can take early retirement if your employer and the Trustees of your pension agree.
You can also retire early if you are seriously ill. The Revenue Commissioners and Trustees may allow retirement at any age if you are permanently unable to work.
What option's do I have when I retire ?
You will have a number of options to choose from when you retire. You don't have to choose now but can decide when you reach retirement age which option suits you best.
Take a lump sum tax free
When you retire you have the choice of taking a tax free cash lump sum. While this is not mandatory, most people take the maximum tax free cash allowed and then consider the other options open to them for the balance of their fund.
The amount of tax free cash you can take at retirement varies depending on how long you have worked for the company and your salary at retirement. The maximum tax free cash available if you have worked in the company for at least 20 years is one and a half times your final salary.
Directors who have more than a 5% shareholding in the company have the option of taking a lump sum of 25% of the fund tax free.
Option 1: Buying an annuity
After you take your tax free cash you can use the balance of your fund to buy an annuity. An annuity provides you with a guaranteed income for the rest of your life.
When you buy the annuity you have several additional options including guaranteeing the period of payment, automatic increases to allow for inflation and providing a pension for dependants.
The options you choose to include will affect the amount of pension your fund can provide. You may use your fund to buy an annuity with any company you choose.
Option 2: Investing in an Approved Retirement Fund
You can choose to invest or withdraw your money at retirement.
Approved Retirement Funds (ARFs) and Approved Minimum Retirement Funds (AMRFs) are funds managed by qualifying fund managers in which you can invest the proceeds of your pension fund when it matures.
After you have taken your tax free lump sum, €50,000, or the remainder of the pension fund if less, must be transferred to an AMRF or used to buy an annuity payable to you.
Any balance over €50,000 can be invested in an ARF or withdrawn as cash. Any cash withdrawn at this stage will be taxed as income.
You do not have to invest in an AMRF if:
- You have a guaranteed pension or annuity of at least €10,000 a year for life (all of your pensions and annuities including Social Welfare Pension can be taken into account for this purpose).
- You are over age 75.
The sum invested in an AMRF cannot be withdrawn until you reach age 75. However, income or growth in your investment in the AMRF may be withdrawn.
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