The 31st of October 2021* is the deadline date for making your once off Additional Voluntary Contributions (AVCs). Often referred to as ‘rocket fuel’ for pensions, these once off payments help you add to your retirement savings and maximise the tax relief you are entitled to. This not only helps you save for your future but reduces the amount of tax your pay today. The deadline is extended until November 17th, for those who file online via ROS.

Reducing Tax

Self-employed construction professionals complete a manual tax return each year, and as such, you may wish to save an AVC prior to the end of each tax year to reduce your tax bill.

If you are self-employed you will have to calculate your tax liability in respect of:

• Your final tax assessment for 2020.

and

• Your preliminary tax for 2021.

You can reduce your final tax liability for 2020, as well as your 2021 preliminary tax liability by making contributions to a pension by 31st October 2021 or 17th November 2021 if you are using Revenue Online Services ROS).

If you are self-employed the following example shows the value of using a pension to reduce your tax liability while accumulating a retirement fund for your future:

For example

Contribution paid 25 October 2021                                           €2,000

Reduction in 2020 tax bill (40% tax payer):                              €800

Actual cost to you of additional €2,000 into your pension:          €1,200

If you make a pension contribution before 31 October 2021 backdated for 2020, you effectively reduce your tax bill for 2020 with the tax relief on pension contributions. This will have the knock on effect of reducing the preliminary tax bill for 2021

While some of us may not have the luxury of disposable income in the current climate, especially when self-employed, it is worth considering what you can afford contribute. Every year you miss out paying these AVCs, you also miss out on the generous tax relief they provide and potential investment gains.

Why should we save AVCs ?

For those of us focused solely on today and feel that retirement is a long way off, there is an immediate benefit of AVCs - tax relief. Paying AVCs will ensure you can avail of tax relief. This is something that will benefit you now and benefit you when you come to retire.

• Tax relief at source: Tax Relief is given at your marginal tax rate of tax on AVCs paid. There are limits on the tax relief, depending on your age. As you edge closer to retirement, your tax relief increases. There is currently a maximum annual amount of earnings for which tax relief is given. Currently this is €115,000 p.a.
• No Tax on Gains: There are other tax advantages for the duration of your retirement saving in contrast to other solutions. There is no tax deducted on any gains you make over the years you save for retirement – this compares well to other investment types where DIRT or CGT are applied.
• Tax free amount when you draw down: Subject to revenue limits, when you retire you can take a substantial amount of your fund tax free.

Comfort in Retirement

Whether you pay AVCs on a regular basis or as a lump sum really depends on your circumstances. For many people, paying a mortgage may take priority, but for some heading into retirement, they may realise that the savings they are making will not be adequate for their future. In this case, making AVCs will help offset this and provide for a more comfortable retirement.

Making AVCs to your pension arrangement provides great benefits - today and for your retirement. Now all that remains to decide is how and when you wish to do it. If you would like to avail of tax relief and make a contribution to your retirement future, AVCs are a great step that can be taken now.

For further information on retirement planning and AVCs, please contact our experienced team via email ([email protected]).

*Please note that all cheques should be received by 29th October 2021.