Question 4.0 Introduction.
Question 4.1 What are AVCs?
Question 4.2 How are they documented?
Question 4.3 Why make voluntary contributions?
Question 4.4 Revenue Requirements
Question 4.5 Advantages of AVCs
Question 4.6 Disadvantages of AVCs
Question 4.7 Form of AVC Scheme / Investment
Question 4.8 Your AVCs and the Main Pension Scheme
Question 4.9 Excess Contributions
Question 4.10 Life Assurance or AVCs?
Question 4.11 Added Years
This section is intended to cover private sector arrangements for Additional Voluntary Contributions. Similar arrangements can be established alongside public sector schemes. However, this section does not go into any great detail on the special "added years" provisions which are available in most public sector employments.
For ease of reference, we shall use the term "AVCs", meaning Additional Voluntary Contributions, as this is the term most frequently used to describe them. Where the main scheme is non-contributory, they cannot, strictly speaking, be called "additional" but the expression "AVC" is used for the sake of brevity.
Voluntary contributions are made by employees in addition to any compulsory contributions which they may make. AVCs are used to improve the benefits of members, over and above those provided by the scheme rules, but within Revenue limits.
It is necessary for the rules of a pension scheme to make provision for AVCs if scheme members wish to make them. If your scheme rules do not allow them at present, you would have to get your employer's consent to change the rules in order to permit voluntary contributions. Alternatively, a separate scheme can be set up to accommodate AVCs but this, again, would need the co-operation of your employer. Although the law does not require schemes to allow AVCs, the Pensions (Amendment) Act, 2002 requires any employer whose pension arrangements do not include an AVC facility to offer access to at least one Standard PRSA, to be used for AVC purposes. Comments about AVCs in this section apply equally to AVC PRSAs.
AVCs can be used, within the limits imposed by the Revenue Commissioners, to:-
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Increase basic pension or provide benefits based on non-pensionable pay.
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Increase tax free lump sum, if possible.
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Provide or increase dependants' provisions on death in retirement.
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Provide or increase cost of living provision on all benefits.
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Increase death in service provision.
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Provide additional security for you and/or your dependants if you retire early.
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Since April 2000, the proceeds of AVCs may, if the member wishes, be transferred at retirement, to an Approved Retirement Fund (ARF), subject to conditions; or to an Approved Minimum Retirement Fund (AMRF) if those conditions have not been met.
The presence of AVCs alongside the benefits available under the main scheme can make it attractive, or even just possible, to accept early retirement, although Revenue rules don't permit specific additional funding with a view to retiring early.
In considering the possible application of AVCs, the following questions are relevant:-
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Is all pay pensioned?
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Is the main pension scheme integrated with social welfare? If it is, the gap created can be used to enhance benefits, in terms of increase in basic pension dependants? pensions and perhaps tax free cash.
Is pensionable service short? Is all service pensionable?
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Has the employee got dependants and if so are dependants' benefits already provided, or are they adequate?
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Is there provision for cost of living increases? If so, is it enough for your needs?
These are dealt with under various headings in other Sections but they are here summarised:-
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Total member contributions may not exceed 40% (depending on age) of gross pay in any tax year, inclusive of any contributions already required by the scheme rules.
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AVCs made annually should usually be deducted on a "net pay" basis - i.e., deducted before tax and PRSI are calculated. This gives immediate tax relief at the point of payment.
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Revenue approval is needed for "special" contributions, i.e. those not being made on a regular basis. Tax relief on these will be spread forward into later years if the total contribution being made in a particular year exceeds the maximum allowed for tax purposes. In any tax year, it is possible to claim unused relief for the previous, if the contribution for that year is paid, and the claim for relief is made, before 31 October of the current year. Backdating of tax relief for up to ten years, which was formerly allowed, was abolished in the Finance Act, 2003.
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When the benefits secured by AVCs are added to the main scheme benefits, the maximum Revenue limits on benefits must not be exceeded.
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Full and immediate relief from income tax, and from PRSI on contributions deducted at source.
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The fund in which the contributions are invested does not attract tax.
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AVCs give the member a facility to have some control over benefit levels, by choosing the pace of additional saving for retirement. The "mix" of benefits at the time of retirement (personal pension, dependants' provisions, cost-of-living increases, etc.) can be adjusted to suit individual circumstances.
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Present legislation allows for the AVC fund to be paid as an additional tax-free lump sum on death.
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Contributions are locked in and may emerge only as benefits on death, retirement or leaving service and the scope for cash refunds of contributions is extremely limited.
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Unlike life assurance policies, a voluntary contribution fund may not be assigned, charged or borrowed against and it is therefore outside the employee's effective control until it emerges as benefits.
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AVCs are not short term savings. While it is possible for a member to stop contributing, no refund of contributions is possible, except in the limited circumstance of leaving employment before completing two years as a member of the scheme.
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If a refund of contribution is taken on leaving service, this would usually exclude the possibility of any other benefit from the company pension scheme.
In the private sector, AVCs mostly take the form of defined contributions. It is quite unusual for benefits secured by AVCs to be set up on a defined benefit basis. For this reason, the investment considerations in AVC schemes are generally the same as those for defined contribution schemes.
Obviously, it is important for every member considering the question of Additional Voluntary Contributions to get proper advice. This advice should take into account the benefits being provided under the main pension scheme, as well as the member's own personal circumstances and considerations such as tax relief and possible return on the fund. Remember that your employer's co-operation, at very least, is needed if you want to set up a voluntary contribution arrangement for yourself. However, bear in mind that most voluntary contribution arrangements made directly by scheme members themselves could involve the employer in becoming trustee, if these arrangements are set up outside the main company pension scheme. Employers may not wish to become trustees in these circumstances and cannot be made trustees without their consent. In these circumstances, employers might be willing to deduct and remit contributions to a PRSA, as this would not involve them in any trustee obligations.
It is also very important that the trustees of the main company pension scheme should be aware that people are making voluntary contributions. It is the responsibility of the trustees to "police" the Revenue limits imposed on members' benefits and it is impossible for them to do so if they do not know that members are making voluntary contributions alongside the main scheme. If scheme members are using PRSAs to make AVCs, there is also a duty on the PRSA provider to make sure that Revenue limits are not exceeded.
You may not take a refund of AVCs except to the extent that a refund of your main scheme contributions for the same period is permitted. Preservation requirements under the Pensions Act impose restrictions in this area. If a refund is taken tax is currently payable at 20% on the amount refunded.
Because the Revenue Commissioners limit the overall level of benefits with which you can be provided under a pension scheme, it follows that there is a possibility that AVCs could in certain circumstances cause the total entitlements of a member to exceed these limits. If this happens, the trustees of the main pension scheme will have no option but to cut back on the benefits provided by that scheme in order to satisfy the Revenue Commissioners' requirements. In exceptional circumstances, the Revenue Commissioners may permit (or even require) excess AVCs to be refunded. If this happens, they will be refunded through the employer's payroll and subjected to full tax and PRSI.
Sometimes, people ask "Should I make voluntary contributions or take out a life assurance policy-linked savings scheme?" The question was perhaps more relevant when some form of limited tax relief was available on life assurance contracts, but this is no longer given. Nevertheless, it might be useful to summarise the differences, since the answer to the question is that there is probably scope for both. Since January 1, 2001, both types of fund accumulate free of tax. The life assurance fund is, however, subject to an 'exit' tax on the gains made. How an AVC fund is treated will depend on how its benefits are dealt with under the Finance Acts and the rules laid down by the Revenue Commissioners' rules (i.e., some of the proceeds might be payable tax free).
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Life assurance is generally suitable for shorter term saving (but not very short term).
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The saver has total control over a life policy at all times.
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The saver can choose the term over which the investment is made.
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The policy can be made paid up or surrendered at any time.
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The policy can be assigned to a third party and in some cases even borrowed against.
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Under current legislation, the fund builds up tax free, but the proceeds are subject to an 'exit' tax based on the gains made.
BUT
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There is no tax relief on premiums and no relief from PRSI.
With AVCs, the position is different:-
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There is full tax relief on contributions and relief from PRSI if deducted directly from pay.
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No part of the amount being saved need go to provide cover in the event of death.
BUT
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No benefits may be paid until retirement, death or leaving service.
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Benefits may not be assigned to a third party or charged with any debts under any circumstances.
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If a refund of AVCs is taken on leaving service (and there is now a very restricted right to do this because of the preservation requirements of the Pensions Act), it is necessary for ordinary contributions to be treated similarly. Deferred benefit entitlements not preserved under the Pensions Act would be lost in these circumstances.
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The Revenue limits mean that the proceeds may not always be payable in tax free form.
Question 4.11 Added Years
Members of Public Sector schemes may make additional contributions to purchase additional years of service credit. The Department of Finance Superannuation Section issues tables under which credits of added years and appropriate contribution requirements are calculated. Purchase of additional service by a single lump sum must be done within 2 years of appointment. Annual contributions may be started at any time. Actual plus purchased service may not exceed 40 years. 'Added years' purchase is not available if your potential service at pension age will be 40 years, even if all your pay is not reckoned for pension purposes.
Public sector employments often offer ordinary AVC schemes as well as the 'added years' facility. It is advisable to take advice about which of these options is best suited to your own circumstances. Indeed, it may be possible to avail of both to a limited extent. The purchase of added years facility means that what you buy includes the all the elements of the pensions package - personal pension, retirement gratuity, spouse's pension and post-retirement increases. AVCs offer a little more flexibility, in that they could be used to enhance one element - for example, tax-free lump sum - within Revenue limits, without having to buy extra (taxable) pension as well.