Would you like to pay less tax whilst also securing additional income in retirement?
Taking the plunge to set up a pension is one that few ever regret. It can be daunting at first but once set up it can be very beneficial for a number of reasons. One of the greatest benefits of a pension, besides the additional future income, are the tax benefits.
- Tax free on the way in: Right now, for every €100 someone on the higher tax rate earns they only take €60 home, a lower rate tax payer would take home €80. An individual could then spend or invest this money. However, with a pension all €100 would get invested into your pension. This is an extra €40 / €20 that otherwise would have been paid in tax
- Tax free growth: It is never too early or too late to start a pension due to the reassurance that your fund can grow completely tax free. No gains will be taxed whilst invested.
- Tax free Lump Sum: When the time comes to drawn down your pension you will be entitled to receive 25% of the fund, up to €200,000 completely tax free. The next €300,00 is then taxed at just 20%. The remaining amount is taxed at 40% with a maximum threshold of €2m. So, for example, if you had a fund of €2,000,000 at time of retirement in your pension you could receive 25% upfront which in this case is €500,000. Of this the first €200,000 is tax free and the remaining €300,000 is taxed at 20%, so you would receive a lump sum of €440,000 and pay tax of €60,000.
When it comes to retirement age you do not have to take the entire amount as a lump sum like the above example shows, there are other options that will allow you extract a certain percentage or certain figure every year from the fund, while the fund continues to be invested.
You may have heard of an annuity which guarantees a certain value each year for as long as you live. You may also have heard of an ARF (Approved Retirement Fund) which can be further invested once your tax-free lump sum has been taken – this fund is available to you, and you can take for example from between 4% and up to 15% out of the fund each year until it runs out.
At retirement age you will be given retirement options by your pension provider and then you can work with your advisor to make sure you take the best option to suit your plans best.
When contributing to a pension, there are a number of criteria that you must be aware of.
- You cannot contribute your entire salary. There are certain limits based of your age and salary (net relevant earnings) with the maximum salary taken into account being €115,000.
The table below shows the maximum percentage of your salary you can contribute throughout your life
| Age | Percentage Limit |
| Under 30 | 15% |
| 30-39 | 20% |
| 40-49 | 25% |
| 50-54 | 30% |
| 55-59 | 35% |
| 60 + | 40% |
- There are a number of different pensions that someone could be invested in. This would depend on whether it is a personal pension or a company pension. A director would be entitled to different benefits compared to a sole trader. Contributions into your pension can be taken at source from your payroll but in some individuals cases they can claim the tax back at the end of the year.
Although pensions are a fantastic way to pay less tax the main reason for setting up a pension should be the end goal. Come retirement when you are no longer working it is essential that you have an income. Becoming a financial burden to someone else is not ideal and with the current state pension being €12,911 it may be very difficult to continue your current lifestyle with the limited income.
Retirement should be a time to relax and enjoy your favourite hobbies. It would be a shame if you had to continue working into your 70’s because you were not financially prepared. Starting a pension early will be something your future self will thank you for.
To get more information on setting up and contributing to a pension, jonathan@castlecapital.ie