Maximum AVC Contributions

What is the Maximum AVC Contribution I Can Make?

Contrary to popular belief, 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 for it to 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 both of the following

1. Pay the contribution to the PRSA provider on or before the 31st October deadline (16th November online)

2. Submit their tax return to Revenue on or before the deadline

Carrying 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.

Case Study

Joe is 30 and earns €100,000 pa. He is a member of his employers occupational pension scheme, into which he pays a 5% pa contribution and the employer matches this 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 €53,505 pa of which only €10,000 pa is currently 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 €40,000 pa 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.

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.

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.