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pensionable salary

  • 14-10-2013 6:43pm
    #1
    Amprodude
    Registered Users, Registered Users 2 Posts: 4,034 ✭✭✭


    Can someone explain in plain English how do AVCs work with a pensionable salary?

    Thanks


Comments

  • #2
    Stheno
    Moderators, Business & Finance Moderators, Science, Health & Environment Moderators, Society & Culture Moderators Posts: 51,690 Mod ✭✭✭✭Stheno


    Do you mean in relation to tax etc?


  • #3
    The_Conductor
    Moderators, Society & Culture Moderators Posts: 32,286 Mod ✭✭✭✭The_Conductor


    As a generalisation- there are two main types of pension-

    1. Defined Benefit- Based on your final salary- typically a fixed percentage earned over a defined period of time. E.g. you might have a pension that guarantees a benefit of 50% of your final salary based on 40 years of contributions (this is the norm in the public sector). In a case like this- if you didn't have 40 years of contributions at age 68- an AVC might be used to either make up the shortfall in your pension- or in some cases, you might be able to use an AVC type arrangement to purchase notional service- that is- you pay an additional 12% of your gross salary (using random figures here) to buy 4 years of notional service- to bring you up to 40 years service at age 68.

    2. Defined Contribution- in this case you (and your employer) sign up to pay a set amount of your salary into a defined contribution scheme. Typically you'd be buying units in a pension trust. Additional voluntary contributions- could be used to buy additional units in a pension fund. If you buy when the markets are down- it might be well worth while (depending on the nature of the units involved).

    As a generalisation- AVCs are a good idea from a tax perspective- as a certain amount of your salary (depending on your age) can be assigned to a pension scheme tax free (its not actually tax free as you pay tax on exiting- its more a tax deferral mechanism). The percentage of your income you can assign to a scheme depends on your age- and on the absolute amount you propose to assign to the scheme.


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