Additional Voluntary Contributions (AVCs)
AVCs are essentially a private savings that you can contribute to in addition to Superannuation should you wish to supplement the benefits from the main scheme. They are not generally operated or endorsed by the employer and should be viewed method of saving for retirement with an insurance company.
People choose to save using AVCs for a variety of reasons but the two main reasons are to have additional money available at retirement and to reduce heir income tax bill while working.
Note that AVCs are a defined contribution scheme and are very different to defined benefit NSPs. AVCs can operate on a group basis, often arranged by public sector unions, or can be set up for an individual by using a PRSA AVCs. Both options are fundamentally the same.
- AVCs are flexible in terms of contributions. You can stop, start, increase and decrease contributions easily and to any level within Revenue limits. Indeed you can adjust them to a level which is the most tax efficient, for example only on the portion of your salary taxed at 41% but not that at 20%.
- AVCs can be used to target a specific retirement benefit such as shortfalls in your tax free gratuity or shortfalls in your post-retirement income. You do not have to save for all possible benefits.
- At retirement you can choose how to access your savings in the most efficient manner possible. Options include tax-free cash, taxable cash, annuities and spouses benefits. Most importantly however AVCs are the only method of savings which gives Superannuated public sector workers access to Approved Retirement Funds (ARFs).
- In contributing to an AVC, your contributions must be invested. The types of investments can range from low risk through to medium risk and even high risk. The investment approach is entirely up to you and can be changed during the lifetime of the AVC. It is important to note however, especially with the medium and high risk approaches that funds can fall as well as rise.
- As AVCs are a private savings, provided by the financial services sector, some charges will apply. Some AVCs are much better value than others however all will carry some kind of charge or fee.
- AVCs are a defined contribution form of savings where the benefits at retirement are largely determine by the amount you save. Defined contribution schemes such as the main Superannuation scheme are defined benefit and are based on final salary, the actual contributions are far less important.
Group AVCs v Individual PRSA AVCs
All AVCs whether they are group or individual carry charges. Group AVCs however have no maximum charges and indeed some group AVCs schemes have ongoing charges and set up fees which are uncompetitive. Standard PRSA AVCs on the other hand are regulated to ensure charges are low. Further an independent advisor will often source an individual PRSA AVC with charges significantly lower than those applicable to those on group AVC schemes.
Tax & PRSI Relief
With both group AVCs or individual PRSA AVCs you are entitled to claim tax relief at source through the payroll or tax credit system at any time of the year. On Group AVCs PRSI relief is granted immediately but with PRSA AVCs it is claimed at year end. As part of our services PSRA arrange tax relief on your behalf and assist with claiming the PRSI relief.
As a member of a group AVC scheme you typically only have the choice of one insurance company or fund manager. With a PRSA AVC you are free to choose from a much greater number of providers and investment funds. Furthermore an individual PRSA AVC is far more portable as it is owned by the individual. As such can be moved from one employment to the next or from one PRSA provider to another if you are unhappy with the performance or service. Group AVCs are more restrictive.
Choosing an AVC
In choosing an AVC it is important to distinguish between the advisor or intermediary and the actual insurance company or product provider.
In choosing a financial advisor there are two key characteristics you should look for:
1. Independent. Does the advisor hold agencies with and do business with a large number of the insurers in Ireland? Are the regulated by the Financial Regulator as an Authorised Advisor? Are they independently owned or are they owned by an insurance company or group? A bank advisor will only advise you on the products available from that bank.
2. Expert. Essentially does your advisor know what they are talking about. Are they properly qualified? Do they have the experience dealing with public sector workers to correctly advise you? Can you trust their advice?
Your advisor will guide you in choosing a product provider or insurance company. This is essentially the company with whom your money will be invested. There are a number of considerations to take into account but 2 key factors are;
1. Investment Return. Your advisor will work with you to choose a fund manager and a fund that matches your investment objectives and has the best chance to generate a return on your money. The greater the return generated, the greater the amount of money in your AVC at retirement. While past performance is no guarantee of future performance it would be foolish to invest with a company and not look at their investment track record.
2. Charges. The higher the charges on your AVC the less money will be in your fund at retirement. Your advisor should select the most appropriate product with the lowest charging structure possible in order to maximise your fund value at retirement. The amount of commission taken by the advisor and their own cost of doing business will impact hugely on this.
To arrange an appointment with a Public Sector Retirement Advisor request a call.
Past performance is not a reliable guide to future performance. The value of your investment may go down as well as up. You may get back less than you put in.