Are you taking ownership of your retirement?
There has been a lot of chatter in the media in recent months about pensions. The future viability of the State Pension has been raised again, with the latest suggestion being considered which would allow people defer receipt of the State Pension for a year or longer, with the reward of a higher pension payable when they then start receiving it. This might work well for people who are happy to continue working into their late 60s.
The other news has focused on the government’s determination to introduce auto-enrolment in 2024. This will effectively require all employers to register all employees (with some exceptions) into a pension scheme, with contributions coming from the employer, the employee and the State. We believe this timeline to be quite ambitious, but watch this space…
It is clear to see that the government is considering every angle to help people fund their retirement. If you are one of the fortunate people who is already in an employer sponsored pension scheme, there is still more you can do! For instance, are you maximising the opportunities available to you from Additional Voluntary Contributions (AVCs)?
The 31st of October 2022 is the deadline to backdate AVCs for 2021. Often referred to as ‘rocket fuel’ for pensions, AVCs help you add to your retirement savings and maximise the tax relief you are entitled to. This not only helps you save for your future but reduces the amount of tax you pay today. The deadline is extended until November 16th 2022, for those who file online via ROS.
Why save AVCs if you are already paying into your pension?
For those focused solely on today and feel that retirement is a long way off, there is an immediate benefit of AVCs - tax relief. Saving AVCs will ensure you can avail of tax relief. This is something that will benefit you now and when you come to retire.
Tax relief at source: Tax Relief is given at your marginal rate of tax on AVCs paid. There are limits on the tax relief, depending on your age. As you edge closer to retirement, your tax relief increases. There is a maximum annual amount of tax relief on earnings set by Revenue, (currently €115,000 p.a.). This amount is adjusted from time to time by the Minister for Finance.
No Tax on Gains: There are other tax advantages for the duration of your retirement saving in contrast to other solutions. There is no tax deducted on any gains you make over the years you save for retirement – this compares well to other investment types where Deposit Interest Retention Tax (DIRT) or Capital Gains Tax (CGT) are applied.
Tax free amount when you draw down: Subject to Revenue limits, when you retire you can take a substantial amount of your fund tax free.
They are a tax-efficient way of saving for retirement. Income tax relief is currently available at your marginal rate as follows:
| AVC Contributed |
Rate of Income Tax |
Reduction in Take Home Pay |
| €100.00 |
20% |
€80.00 |
| €100.00 |
40% |
€60.00 |
Whether you save AVCs on a regular basis or as a lump sum once a year (before the tax deadline), really depends on your financial circumstances. For many people, paying a mortgage may take priority, but for some heading into retirement, they may wish to increase their retirement savings for their future. In this case, saving AVCs will help reduce tax liability and provide a more comfortable retirement financially.
Making a regular AVC payment would suit PAYE employees who are members of an occupational pension scheme. This means you contribute by way of salary deduction via payroll and receive tax relief at source.
However, if you have other sources of income that necessitate a manual tax return each year, then you may wish to save an AVC prior to the end of each tax year to reduce your tax bill. You can save an AVC prior to the 31st October each year (or later if you complete your tax return online – i.e. 16th November in 2022), 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 current year.
Making AVCs to your pension arrangement provides great benefits - today and for your retirement. Now all that remains to decide is how and when you wish to do it. If you would like to avail of tax relief and make a contribution to your retirement future, AVCs are a great step that can be taken now.
For further information on retirement planning and AVCs, please contact our experienced team by email (info@cers.ie).
Please note: If you are not availing of the ROS extended deadline, all cheques need to be received by CERS by close of business on Friday 28th October 2022.