Contrary to popular opinion, there actually isn't a maximum contribution you can pay
There is however a maximum contribution that qualifies for tax relief in any one tax year and a maximum pension fund that you can accumulate and still qualify as an occupational pension.
Tax relief on contributions
Most of us will be familiar with the following table
Total earnings limit
The maximum amount of earnings taken into account for calculating tax relief is €115,000 per year.
Important planning - carried back tax relief
Pension contributions paid this year may be carried back against last year's income.
A self-employed client who wants to pay a personal pension or PRSA contribution and backdate the income tax relief against their prior year earnings needs to do the following
1. Pay the contribution to the PRSA provider on or before the 31st October deadline, and
2. Submit their tax return to Revenue on or before the deadline
Important planning - Carried forward tax relief
A less well-known planning option is that over payments can be carried forward indefinitely against future earned income
At a time of historically low interest rates it could make sense for some people to over pay their AVCs and carry forward the tax relief against future earned income.
Joe is 30 and earns €100,000pa. He is a member of his employers occupational pension to which he pays 5% and the employer matches with a 5% contribution.
Joe has €200,000 saved in the bank and was thinking about making a maximum AVC contribution. His broker told him that he could pay 20% of his gross salary less the 5% he is paying into the main scheme which he joined 5 years ago. His pension is currently worth €75,000 and he has no other pension benefits.
€100,000 x 20% = €20,000
less €100,000 x 5% = €5,000
"maximum" AVC therefore €15,000
Is this really the maximum?
Using the Revenue maximum funding tables we estimated the maximum allowable pension contribution that could be made for Joe.
So, the maximum annual contribution is actually €53,505pa of which only €10,000pa is being used on an annual basis (5% employer and 5% employee contribution)
The upshot of this is that Joe can easily pay in an additional €40,000pa and not exceed the Revenue maximum benefits at age 60. Indeed he can pay a lump sum now of €180,000 to catch up for past service.
Joe could therefore pay in all of his €200,000 savings to a PRSA AVC and this would only represent 5 years contributions.
ONLY 20% of the contribution less the 5% he pays into the main scheme would qualify for tax relief on an annual basis but the excess will be carried forward to future years.
At the 20% current allowable rate it would take over 13 years to obtain all the available tax relief. However, note that age 40, the tax relief increases to 25% so in reality the tax relief is earned more quickly.
AVCs Technical details
An AVC plan forms part of the main Scheme and, as such, the Trustee of the main Scheme will monitor for possible over-funding (overpayment). This position may occur if your personal account provides a pension that would bring you over the maximum pension limit.
A basic maximum accrual rate of one-sixtieth of final remuneration for each year's service is approvable for any period of service of 40 years or less (a pension on this basis is commonly described as a pension of N/60ths).
The calculation of final remuneration is the average of the total emoluments for any three or more consecutive years ending not earlier than ten years before the relevant retirement date.
Normally the retirement benefits which are payable under the rules of your main company pension plan are lower than the maximum benefits which are permitted by the Revenue Commissioners.
Therefore, most people have scope to pay AVCs to increase their retirement benefits. For example, some of your earnings may not be included in the calculation of the pension amount payable from your main plan - e.g. overtime, bonuses, commissions or car allowance or you may have entered your pension plan at an age when you are not expected to receive full pension benefits from your company’s main pension plan when you retire.
If you are a member of an occupational pension scheme in the private or public sector, you can make additional voluntary contributions as an AVC to the main scheme, in a defined benefit scheme you may be able to purchase “added years” or a notional service pension or you could contribute to a PRSA.
If you make additional voluntary contributions to a PRSA, then your benefits will be subject to the rules of the scheme and the Revenue limits applying to occupational pension schemes.
Note that in order to obtain the maximum benefit from pension contributions you are better off having your contributions paid as an employer contribution to an occupational scheme (52% tax relief plus employer PRSI relief at 11%) rather than as an AVC which only obtains 40% tax relief. However, you ideally need to do this BEFORE signing employment contracts or you may fall foul of salary sacrifice in the eyes of Revenue.
You should note however that there are now maximum fund thresholds in place. A fund threshold is the maximum fund that a person is permitted to have for providing retirement benefits. If your fund is greater than the fund threshold then the amount in excess of the threshold will be subject to income tax at your marginal rate when you retire. The maximum fund threshold is €2.0 Million Euro.
From the Revenue pension manual
Tax relief in respect of contributions in any one tax year is subject to the limits for employee contributions, as detailed in Chapter 3.
Relief for employer contributions is subject to the rules in Chapter 4 .
The limits on Tax Relieved Pension Funds also apply, please see Chapter 25.
Care must be taken to ensure that overfunding does not occur, as surplus funds may have to be refunded to the employer and taxed as a trading receipt.
Details of maximum retirement benefits are contained in Chapter 6.
Additional voluntary contributions (AVCs) can be made if the total of employer contributions and employee normal contributions do not exceed the above limits and the total employee contribution limits as outlined in Chapter 3.
So I’m conclusion there are two clear risks here.
1) Maximum benefits that are available from the occupational scheme need to be assessed against the best 3 years in the previous 10 years so a reduction in earnings at the end of career may not be an issue.
2) Pension benefits in excess of the SFT currently €2m suffer an effective marginal rate of tax of over 70%
so care needs to be take not to overfund a pension via AVCs and in the worse case scenario an overfund goes back to the EMPLOYER. Not such a bad outcome if you own the company but a poor outcome for an employee.
BUT, you are getting gross roll up free from personal taxes so all things being equal you will accumulate a larger fund than you would under an alternative personal investment option such as a rental property.