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.
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.
There isn't a maximum contribution you can pay into your pension. Pay a lump sum to your pension now and carry forward the tax relief.
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