AVC Pensions Explained
AVC pensions are a supplementary voluntary contributions scheme that you can build in conjunction with your workplace pension. It can be a tax-efficient mode of increasing your pension savings since any voluntary contributions you pay into your pension will be deducted from your salary before taxes.
AVC pension schemes are mainly practical if you want to put off saving for your retirement until the sunset years or have some disposable income that you’d like to save effectively.
How Do AVC Pensions (AVCs) Work
So let’s take a closer look:
An AVC pension scheme is provided by your boss or its board of trustees, based on the firm you work for. How you can benefit from the pension plan depends on the form of workplace pension you have in place. If you have the defined contributions pension scheme, you’ll have the ability to become a part of the defined contribution AVC plan.
The cash you contribute into the AVC pension scheme will be capitalized, and the value of your pension plan will be dependent on the amount of money you contribute, and your investments ‘performance over time.
If you have the defined benefits pension scheme, however, you can save additional pension contributions into the defined benefits AVC pension or the added years AVC. Since the defined benefits pension scheme pays a retirement income that’s dependent on your wages and how long you work for your boss. The defined benefit AVC pensions are different from the defined contribution AVC pensions.
Rather than contributing extra capital to be invested, the cash you pay into a defined benefits AVC will be used to purchase additional time in your employer’s DB pension plan. You can then use that to raise your pension benefits when you enter into retirement.
Here’s the best part:
As long as your current boss provides the AVC pension, the pension scheme can be a flexible way of increasing your retirement savings since they enable you to make either monthly or lump payments whenever you need to. You can also move your AVC pension scheme to another employer if you switch your jobs, provided that they have a compatible pension plan.
What Are the Advantages of An AVC Pension?
Like any other financial plan, AVC pensions have several advantages, which include:
You don’t have to commit to contributing a specific amount every month.
While your boss and pension provider might have minimum contributions, you can also opt to save more when you can afford it.
If you’re faced with urgent financially draining matters, you can cut back on your pension contributions to the minimum without incurring any penalties.
It gets better:
AVC pension schemes are also entitled to government tax relief1 on pension contributions which offers you a significant increase in everything you contribute to them. Due to that reason, an AVC pension scheme can be a tax-efficient option for those with higher incomes, since it enables you to save more of your capital to enjoy retirement.
What Are the Disadvantages of An AVC Pension?
There are various drawbacks to taking out the AVC pension scheme. Some of these include:
When you choose the AVC pension plan via your employer, you won’t have greater flexibility as with other private pension schemes. The capital locked in your AVC pension might be tied up until you start withdrawing money from the principal pension plan. Additionally, even if a certain percentage can be maintained when you switch companies, you might not be able to grow it if you resign from your role.
As you make contributions to your AVC pension pot, there’s a chance that the value of your pension pot could increase or reduce due to the inflation rates.
That said though; pension plans tend to more be secure than other forms of investments because of the tax benefits and their long-term nature.
Paying Additional Voluntary Contributions
You can pay in as much or as little as you’d like into your AVC pension scheme provided that you don’t surpass the pension contribution limit, which applies to all the pension schemes. For the 2020/21 financial year, this limit is set at about 100% of your wages, with a cap of £40,000. AVC pension schemes are also eligible for the AVC pension tax relief from the state.
The standard amount of tax relief one can receive is a 25% tax top-up for the standard rate taxpayers. That means that if you contribute £100 into your pension fund, the HMRC2 will effectively include another £25.
AVC Withdrawal Rules
You can quickly cash in your AVC pension, but you need to have reached 55 years of age whether you’re still in the employment sector or are about to retire. How you opt to cash in your AVC at 55 years will be based on the rules and regulations of the pension scheme.
You can also take out the capital as a lump sum, keep the cash invested via an income drawdown, or buy an annuity. Nevertheless, if you opt to access your AVC pension funds, after the initial tax-free amount, an income tax will be charged at the maximum rate.
Got Questions? Check These First
Are AVC s Good?
Yes, they’re excellent. AVC pension schemes have two main benefits: they allow you to grow your pension fund and the pension scheme also help to ensure that you receive the maximum tax-free lump sum amount upon retirement.
If you have the defined contributions scheme, an AVC pension scheme can also help in increasing your tax-free lump sum.
How Much Can You Pay into An AVC?
Well, you can contribute into your AVC pension pot up to 100% of your taxable benefits in one tax year, as pension contributions. For instance, if your monthly pension contributions are 6%, you’ll have the option of paying a further 94% of your income as tax-free AVCs.
Can You Take An AVC as a Lump Sum?
Yes, you can. If you need the capital, you can receive your AVC pension pot as a one-off payment. Typically, the initial 25% is untaxed, while any other withdrawals are subject to income tax.
If you don’t require the cash urgently though, you can leave the remaining capital in your AVC pension pot and withdraw cash lump sums when you need to.
How Much Can An AVC Pay in Ireland?
The maximum income limit for tax relief on your pension contributions is €40,000. That means that with the current yearly allowance limit if you’re paying an income tax at the introductory rate of 20%, you can get a maximum amount of €8,000 of pension tax relief towards your pension pot.
If you’re on the higher-tax taxpayer band of 40%, you can receive up to €16,000 of tax relief. Those in the additional rate taxpayer band of 45% would receive €18,000 in tax relief.
In a nutshell:
AVC is an excellent choice if you’re looking for an easy way to save and invest your money. They offer low-cost access to stocks, bonds, ETFs, CDs, and more with no account minimums or fees on any of their plans.