Don’t make an additional voluntary contribution to your pension – until you read this

Retirement savers have just another two weeks or so until the November 18th deadline for tax relief on additional voluntary contributions (AVCs) for 2025 passes.

Often described as “turbo fuel” for your pension, the benefits of these payments are many. You can maximise available tax relief, improve your chances of retiring early, and you’ll hopefully have a bigger fund to draw down in retirement thanks to them.

But before you lock your money away through AVCs, it’s also worth taking a moment to consider if they are the best option for your money at a particular point in time.

Your money is locked away

Once you put additional money into your pension, it is locked away until you can retire. But what if you need it for your health? Your children? To pay down expensive debts? Repairs on your house, or just for those holidays you want to take now, rather than wait until retirement?

“It’s really a case of having a financial plan – and prioritising what’s most important,” says Mark Ryan, director of My Wealth Management.

Putting money into the stock market, an investment fund, or a high-yielding deposit account can still give you the potential for real gains, while maintaining flexibility. Of course, you are giving up on the tax relief – but this might be okay.

“Tax relief, while it’s great, shouldn’t be the only consideration. It’s of little benefit if it leaves you short of money for other needs,” says Sinead McEvoy, head of retirement solutions at Standard Life.

For McEvoy, a solid approach can be doing “a bit of both”. Put some money into a rainy-day fund, for example, and some into an AVC.

She is often asked whether or not you should prioritise your pension, or paying your mortgage.

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For some, the psychological impact of paying off a mortgage is huge, and this can take priority when it comes to spare cash. But focusing on it solely may not be the right approach either.

“I don’t think I’d pay off all your mortgage and ignore your pension,” she says. “Think of all the compounding you’re missing out on by paying off your mortgage.”

“It would be a preference for some people,” Ryan agrees, referring to paying down the mortgage first. Another option, he suggests, is to boost your AVCs now, and hope for investment growth, and use the bigger lump sum when you retire to pay down the mortgage at that point.

You won’t benefit from the same tax relief as AVCs by paying down your mortgage, so it can be worthwhile to “crunch the numbers” before making a decision.

Indeed, there can be an opportunity cost of this approach; you are giving up on tax relief, which can supercharge your pension fund.

Consider €200 invested every month for 10 years. If it returns an average of 6 per cent a year, it will deliver almost €32,500. But if tax relief had been available, at the higher rate, you would have had €280 going into the investment each month – so the return would have been significantly higher, at €45,500. You just wouldn’t have been able to withdraw it.

You may end up paying a higher tax rate in retirement

“I get asked this question often,” says Ryan. “Why would I put in money to get tax relief at 40 per cent when I pay it at the same rate in retirement?”

Remember, the tax relief you enjoy on AVCs is only deferred; when you draw down your pension, you may pay income tax on it. So then, you need to bear in mind the value of this tax relief – while it will grow tax-free, which is very beneficial, it can be particularly valuable if you get relief on it today as a higher rate taxpayer, and draw it down at the standard rate of tax in retirement.

While a higher tax rate in retirement is indicative of a healthy fund, it may be a consideration for those close to the higher tax bracket.

“Those on the borderline (of the higher rate), and considering AVCs, then it’s a conversation worth having,” says Ryan. “I have had scenarios where people have decided not to do AVCs because of that.”

Others, however, will opt for the ‘bird in the hand’ approach, and take what’s on offer now – tax relief – rather than predict how the future might play out.

This decision may be only for a certain cohort, however. First of all, to maximise your tax-free lump sum on retirement of €200,000, you will need a fund of €800,000 – 25 per cent is tax-free; amounts between €200,000 and €500,000 are taxed at 20 per cent. “And that’s a significant pension fund for most,” says McEvoy. “Typically, people are underfunding their pensions.”

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So, paying in AVCs can help bump up your tax-free lump sum.

And, paying tax at the higher rate on your pension “just isn’t the case for most people” says McEvoy, pointing to the more generous tax bands available for the over-65s.

As our table shows, a married couple with an annual pension income of €36,126 won’t pay any tax in retirement, while single people aged 65 and over won’t pay tax on earnings of less than €18,000.

However, as income rises, retirees will see a growing proportion of their income taxed at the higher rate. A single person earning €45,563 from a combination of state pension and private pension income, for example, will pay a certain portion of their income at the higher rate of 40 per cent (€1,563 for 2026), thus pushing their effective rate up to 12.3 per cent. And it increases from there; someone earning €75,563 a year in retirement will pay the top rate of tax on €31, 563 of their income – for an effective tax rate of 24.5 per cent.

AVCs have to be drawn down at the same time as an occupational pension

Having different pension vehicles in play may give you greater flexibility as to when you have to draw down your pension. PRSAs (Personal Retirement Savings Accounts), for example, can be drawn down between 60 – or 50 if it isn’t tied to an employment – and 75. It might also help keep your pension income in retirement taxed at the lower rate.

Remember, however AVCs are funded – either through the main scheme or an AVC PRSA – they are tied to this main scheme.

“When you have an AVC, it must be retired at the same time as the main scheme,” says McEvoy. So, there is no flexibility available when putting your AVC money into a separate pension vehicle.

However, there might be the opportunity to segment your pension into different PRSAs at retirement, so that you can draw them down at different ages.

There is some flexibility, however, if you’re not happy with the fund choices offered in your occupational/public sector scheme.

AVC PRSAs can be used to offer greater investment choice. But the charges might be higher than in your occupational scheme, so this should be considered.

What are AVCs?

In short, AVCs are additional payments you make to your occupational or public sector pension to boost your fund, and hopefully your income in retirement.

If you have already maximised your matching contributions (ie, your employer contributes 6 per cent of salary if you contribute 6 per cent), and you have extra cash, you can consider putting this into your pension via an AVC.

As with all pension savings, the big advantage here is the tax relief you get – if you’re a higher rate taxpayer, for example, a €1,000 contribution to your pension will only cost you €600.

How much you can contribute and avail of tax relief will depend on Revenue limits. Tax relief is offered as a percentage of your net earnings, and increases in line with your age. So, if you’re aged between 30 and 39, for example, you can put 20 per cent of your earnings into your pension and get tax relief on it (so up to €10,000 a year if you earn €50,000, for example). This percentage increases to 30 per cent for those aged 50-54; 35 per cent for 55-59; and 40 per cent for 60 and over.

When it comes to making an AVC, you can do so on a regular or one-off basis, so they offer good flexibility. A maximum annual limit of €115,000 applies.

If you haven’t made AVCs for 2025, and you do so before the online tax return deadline of November 18th, you will be due a tax saving.