Can anyone please tell me what AVC is and how it relates to a pension?

K

Killter

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Im tearing my hair out trying to understand pensions. Can anyone please tell me what AVC is and how it relates to a pension.

Cheers,

Killter
 
Have you browsed the Key Posts?

AVC=Additional Voluntary Contribution

Say under the rules of your employer's pension scheme you contribute 5% per annum to your pension. Any amount in excess of 5% would be an AVC. You can get full tax relief on AVCs, subject to limits depending on your age.

AVCs may not make sense where you are a public servant entitled to buy back years of service, or if you are a member of a generous defined benfefit scheme.

Much more information in the Key Posts and on the Pensions Board website.
 
if you are a member of a generous defined benfefit scheme.
Click to expand...

Even if you are a member of a gererous pension scheme it can still be beneficial to pay into an AVC in the following circumstances

1. Where the state pension is deducted from your pension (Most schemes deduct the state pension)
2. Where you will receive less than 2/3 of your final salary
3. Where final salary is significantly less than your P60 because of BIK, co car, car allowance etc
4. You may have to retire before expected retirement age as a result of Redundency, early retirement package etc.
 
Add to that:

5. Where the spouse/children's pension is less than that received by the retiree before death - which is the usual situation (Revenue now allow full pension in such circumstances).
6. Where a deduction is made from the 2/3 of final salary to fund a tax free lump sum (eg. public servants with full service sacrifice 16.67% of final salary to fund a 150% lump sum) there is now very substantial scope for AVCs in all cases.
 
asdfg said:
1. Where the state pension is deducted from your pension (Most schemes deduct the state pension)
Click to expand...
What!!!!!!! Surely this cannot be. If this were the case nobody would be joining company pension schemes and would be opening PRSAs instead where the state pension would be paid in addition to it. My understanding was that yes the state pension would be taken into account with company pension scheme but it would only be based on a % being deducted. I cannot make sense that somebody pays PRSI all their working life to entitle them to state pension to only have it then deducted from a company pension scheme that they contributed to themselves over their working life. Please please clarify as I am about to take the plunge and join company pension scheme.
 
The logic for deducting the State pension is this:
  • You contribute to the State pension (PRSI)
  • Your employer contributes to the State pension (PRSI)
  • The State pension provides a basic safety net (circa €200 p.w. for a single person and circa €380 p.w. for a couple)
  • Most (but not all) Defined Benefit occupational pension schemes take into account that the State looks after the first €300 p.w. of earnings (as 2/3rds of €300 equals the €200 State pension).
  • Therefore occupational pension schemes often reduce the actual salary of employees (for pension calculation purposes) by the first €300 p.w. and then promise a pension on any salary above €300 p.w.
  • Contributions by employees (if any) are also usually calculated on the same "pensionable salary" (i.e. Salary less 150% of the basic State Pension).
So the logic is that the Sate looks after the first €300 p.w. of salary and the occupational scheme looks after the excess.
 
Conan said:
So the logic is that the Sate looks after the first €300 p.w. of salary and the occupational scheme looks after the excess.
Click to expand...

So Conan, based on the above and in light that I am (and hope to continue to be) working on part time basis until retirement earning say 500 gross pw am I reading it right that I would probably be better off in this situation taking PRSA out rather than joining company pension scheme. Am 41yrs old.
 
Happy - I think you are missing the point.

Conan was referring to a DB scheme and merely pointing out that the salary is usually adjusted by a factor of the state pension.

Whether a PRSA or company pension is most suitable for you is a completely different question and one that cannot be answered unless you give the detail of each scheme (i.e. DB or DC, contribution rate etc...).
 
I was making the point where a person had completed 40 years service. Basically your pension is based on 1/60 for each year completed up to a maximum of 40 years less 1/40 of state pension for each year completed

So lets say you start work at age 45 and work for 20 years in a company and retire on a pension of say 60K
Pension will be calculated as
20/60 of 60K = 20K
less 20/40 of 10K = 5K
Pensionable salary 15K
 
South said:
The OP is not referring to a DB scheme.
Click to expand...

Perhaps the OP can tell us whether his scheme is DB or not and if so whether it is coordinated/integrated with social welfare or not.

Most questions here about AVC's relate to DB schemes.
 
Hi

Havent a clue what Im being asked! so what Ill post what I was looking into..


A standard PRSI with E.Star. My company wont contribute. Im not on social welfare so dont think its linked to that.
And thats all I know! Its through LA Brokers.


As ever, thanks a million

Killter
 
Last edited:
You mean your employer offers the workers a standard PRSA, but does not contribute to it themselves?

This means it's a defined contribution pension.

This would also suggest that AVCs are irrelevant in this scenario
 
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