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Tax Advantage of a Pension Plan

Tax Advantages: Pensions are a very tax-efficient way of saving

When you contribute to a company pension scheme, the net cost or the ‘real’ cost to you isn’t as high as you would initially think. The Government provides generous tax relief at your highest tax rate to encourage pension saving.

In other words if your income levels bring you into the higher income tax bracket then you get tax relief at that rate. Likewise, if your income level means that you are paying tax at the lower rate only, then this is the rate at which you get the tax relief.

How pension tax relief works

What this means is that if you decided for example, to save €100 a month into your pension plan, your payroll department will arrange for that amount to be paid into your pension plan directly from your salary. They will also calculate and apply the tax relief that you are entitled to. Your take-home pay will only reduce by the difference.

Examples of income tax relief

For example, for every €100 you contribute, your take-home pay will only be reduced by €59 if you pay tax at 41%and by €80 if you pay tax at 20%.  €100 is invested into your pension plan.

This means that should you contribute €300 a month, your take-home pay will only go down by €177 if you pay tax at 41% and by €240 if you pay tax at 20%, but €300 will be invested into your pension plan.

If you pay tax at 41%

If you pay tax at 20%

€100

Total Investment to your pension

€100

– €41

Less tax saved

– €20

€ 59

Net Cost to you

€ 80

Are there any limits on pension saving?

It would be nice if you could save unlimited amounts into your company pension plan and get tax relief, but because the tax breaks are so good, the Government puts limits on them. These limits are very generous and are based on your income and age and they are subject to a maximum earnings limit (see paragraphs below).

The following table shows the percentage of your income that you can get tax relief on when contributing to a pension plan, depending on your age.

Age

Maximum % of taxable earnings allowable for tax relief on your pension contributions

Under 30

15%

30-39

20%

40-49

25%

50-54

30%

55-59

35%

60 and over

40%

 

Earnings limit and maximum fund size

The maximum earnings limit from 2013 is €115,000. The earnings limit is subject to review and change each year. You may only claim tax relief within the above limits. There are also limits on the benefits that may be provided.

There is a maximum Revenue-allowable total pensions fund on retirement. This is known as the Standard Fund Threshold (SFT).

From 1 January 2014, the maximum pension fund allowable for tax relief is €2 million. The maximum will apply to the combined value of all pension provision held for an individual. Any fund in excess of this amount will be liable to a once-off income tax charge at the top rate of tax (currently 41%) when it is drawn down on retirement. This limit may be adjusted annually in line with an earnings index.

Taxation of Benefits

While you may receive tax relief on your contributions as they are invested in your pension arrangement, your benefits may be taxed as you take them at retirement. Any pension you receive will be subject to income tax under the Pay as You Earn (PAYE) system and may also be subject to the Universal Social Charge. While you may be able to receive some lump sum benefits tax free, other lump sum benefits may be subject to tax.

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