An AVC is a voluntary contribution made by employees in addition to the required contributions if any, that are to be made to their company pension schemes. Generally, an AVC is made to take advantage of the tax benefit and to also improve the benefits available at the time of retirement. AVC's are subject to Revenue limits.
The option of AVC's is usually provided in the trust deed and rules of the main scheme. A separately constituted scheme may alternatively be available for AVC contributions.
Finance Act, 2002 - Changes to Company Pension Rules including AVC's
The Finance Act, 2002 provided for a significant improvement in the taxation relief for members of occupational pension schemes.
In order to encourage employees to increase their level of pension cover, the following changes have been made :
(1) The previous limit of 15% of qualifying annual earnings for tax relief for contributions, including Additional Voluntary Contributions (AVC's) by employees into occupational pension schemes has been increased to the tax relieved limits that applied to contributions by those not in occupational pension schemes, to Retirement Annuity Contracts (RAC's). These limits are:
Up to 30 years of age 15% of net relevant earnings
30 up to 40 years of age 20% of net relevant earnings
40 up to 50 years of age 25% of net relevant earnings
50 years plus 30% of net relevant earnings
The overall existing maximum pensions benefit rules will continue to apply.
Revenue Limit on AVC's:
For tax relief purposes, an employee's total pension contributions cannot exceed the limits as set out above, in any year. This is inclusive of any ordinary contributions made, subject to the following conditions:
- The additional benefits secured by AVC's, when added to the benefits of the main scheme, must be within the approval limits set by the Revenue Commissioners.
- No more than 5 / 6 of the member's total benefits from all pension schemes of the employer may have been paid for by the member.
The Uses of AVC's:
AVCs can be used for the following, subject to Revenue rules::
- Increase basic pension or provide benefits based on non-pension able pay;
- Increase tax-free lump sum, if possible;
- Provide or increase dependants' provisions;
- Provide or increase cost of living provisions; and
- Provide additional benefits on early retirement.
Once paid, AVC's are locked into the scheme, similar to ordinary contributions. Independent advice is strongly recommended.
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