Why make additional voluntary contributions?

In order to build up the maximum allowed pension benefit of two-thirds of final salary, members of traditional defined benefit pension schemes like those in the public sector must have 40 years' unbroken service, and the scheme will have to be set up to give them a benefit of 1/60th of their final salary for each year of service (40/60ths equals two-thirds).

But some schemes only give a benefit of 1/80th of final salary for each year of service, while people often take career breaks, switch jobs, work only part-time, or do not find pensionable employment until their late 20s or early 30s.

Private sector employees are more likely to be members of a defined contribution rather than a defined benefit scheme. They will typically only contribute 5 per cent of their salary to their main scheme, while the employer will match that amount. But pensions experts warn that average defined contribution scheme members should be doubling their pension contributions if they want to have adequate income in retirement.

Additional voluntary contributions (AVCs) are a way to bridge the gap. The main advantage of saving through an AVC scheme rather than any other savings or investment scheme is that there is tax relief available.

For workers who pay tax at the higher rate of 42 per cent, plus PRSI (4 per cent) and the health levy (2 per cent), an AVC of €100 only costs a net €52.

The tax relief on pension contributions is subject to limits based on a percentage of income. The relief allowed increases as people get older - people over the age of 50 can contribute up to 30 per cent of their net earnings to a pension - and there is usually plenty of scope to make AVCs without breaking the Revenue's overfunding or tax relief limits.