Advice need on increasing AVC contribution

billyhead

I am a civil servant with an AVC plan set up (currently paying approx €80 per forthnight). I received a letter today from the administrators saying that from September the PRD (PENSION RELATED DEDUCTION) is due to reduce again and advising me that I should advise of the tax relief by increasing my AVC contribution by the proposed increase in forthnightly salary of €15.30. For those who are knowleageable about pensions etc would you suggest this would bea good idea?

billyhead

Bump. Can anyone offer advice?

dennyk

Just from some quick reading, it sounds like they're bumping the salary threshold at which the PRD kicks in, which would have the effect of reducing your PRD deduction. Sounds like they're suggesting increasing your AVC pension contributions by the same amount so that your taxable income remains the same. Best I can tell, it's probably not a bad idea, as from what I'm reading, the PRD amount you pay isn't a pension contribution and has no direct impact on your eventual benefits, while any AVCs you make would presumably be an actual pension contribution and would accumulate in your pension account and thus increase your eventual pension payout.

In simple terms, say right now they pay you €1000 gross salary every two weeks and take out €50 of that for your PRD (10% of your salary over €500). You only pay taxes on the remaining €950. Now they're bumping the threshold at which they begin taking out PRD to €600 instead of €500, so they'll be taking out €40 instead of €50, and you'll have to pay tax on the remaining €960. However, if you choose to contribute €10 to your pension account via an AVC, your taxable income will be reduced to €950 each paycheck (same as it was before), and your pension account will grow by €10 every two weeks, so after a year, you'll have paid the same amount of taxes and taken home the same amount of income as you did last year, but you'll also have €120 in your pension fund as well.

In general, if you can afford it it's often a good idea to contribute to your pension plan (via AVCs) up to the maximum tax relief level (which is a percentage of your gross income depending on your age).

Edit: Just to clarify, my numbers are entirely made up and don't reflect the actual PRD thresholds or deduction amounts...

billyhead

Thanks a mil for the helpful info. Its much appreciated