The Finance Act 2013 introduced a facility to allow individuals access up to 30% of their accumulated Additional Voluntary Contributions. This facility was made available for a 3 year period which will cease on 26th March 2016. As the deadline approaches, we received a number of queries to date around what qualifies as an Additional Voluntary Contribution, how would an early access AVC drawdown be taxed and under what circumstances should a drawdown be considered.
An Additional Voluntary Contribution is a pension payment that would have been made by a member of an Occupational Pension Scheme, in addition to the employee and employers regular contribution. The following Individuals may be eligible to access part of their AVC fund:
- Individuals currently part of an Occupational Pension Scheme
- Individuals who are no longer part of the scheme but hold a preserved benefit (no longer work for that company, but left their pension as part of the scheme)
- Individuals who moved their AVCs to a Buy out Bond after they left employment, where the employee AVCs can be clearly identified
When it is determined that a client has made Additional Voluntary Contributions, the next question we are asked is “how are funds taxed if I take a drawdown from my AVC?”
AVC draw down is subject to Schedule E under the PAYE system. It is important that the scheme administrator holds the individuals tax credit certificate (obtained from your local Revenue office) in to ensure the individual is tax at the appropriate rate. In the absence of a Tax Credit Certificate income tax will be applied at 41%. The withdrawn funds from an AVC will not be subject to USC or PRSI.
With the above in mind, it is important to assess whether it makes financial sense to draw down part of the AVC fund now, or wait until retirement. When it comes to advice on AVC fund draw down the following circumstances would suggest a drawdown now should be considered:
- Where an individual’s pension fund is likely to be in excess of €2 million at retirement:
A combined pension value in excess of €2 million, will be subject to Chargeable Excess Tax at 40% on the excess. Consideration should be given to drawing down funds from the AVC now to reduce the Chargeable Excess Tax liability as far as possible. By taking an AVC drawdown now, the funds are not viewed by the Revenue as a Benefit of Crystallisation Event for tax purposes. This means that funds accessed prior to the 26 March deadline will not count as part of the €2 million pension limit.
As outlined above, where an individual’s fund is in excess of €2 million, the excess will be subject to 40% Chargeable Excess Tax. The remaining fund will then be used to fund retirement benefits. When retirement benefits are been drawn down, they will be subject to a further 40% PAYE and USC of 3%. The net value of the funds in excess of €2 million will be 34.9% to the client as a result of double taxation.
- Where an individual is in late arrears on their Mortgage payments and cannot accumulate sufficient capital to make their repayments. An AVC draw down could be used to clear the arrears and prevent legal action from the bank where the mortgage is held.
There are many factors to be taken into account when considering a drawdown from an AVC. We strongly recommend that you seek financial advice in order to assess whether this is in your best interest financially. Please contact our financial planning team on 061-518365 to discuss this or any other Financial Planning queries you may have.
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