Pension tax relief made simple JENNIFER
If you think that taxation is all about take, take, take - then it's time to think again. That's because there is a way to cut down on the amount of your money that the Government takes. Not only will you benefit from a lower tax take now, but you’ll also see a financial benefit at a time in your life when you might appreciate it most: when you retire. The Government has recognised the importance of planning and saving for retirement for many years now. It knows that the State alone cannot afford to pay most of the population a reasonable income when they retire and are no longer earning a regular income. The country's retired population is rapidly increasing and by 2021 there is projected to be almost 300,000 more people over the age of 65 living in Ireland than there was in 20021. As life expectancy, living standards and lifestyle expectations rise, the Government knows that State-funded retirement for all is a fiscal impossibility. So keen is the Government to encourage people to plan for their retirement that it gives valuable tax breaks to people who use a pension plan to prepare for the years when they are no longer earning an income. These tax breaks are distributed in three ways: Tax relief on the money you pay into your pension plan The Government gives you generous tax relief at your marginal rate on the contributions you pay into your pension plan. In effect this means that every €100 you pay into your pension actually only costs you: > €80 if the highest rate of income tax you pay is 20% > €59 if the highest rate of income tax you pay is 41%. Of course there are annual limits to the amount of your income that you can pay into your pension and enjoy tax relief, yet even these limits are very generous indeed: Age % of annual income Under 30 30-39 40-49 50-54 55-59 Over 60
15% 20% 25% 30% 35% 40%
Tax relief on contributions is also subject to an upper contribution limit of €115,000 per annum. Tax-free growth on the money invested in your pension The money you contribute to your pension plan is invested on your behalf by your pension provider, usually in a mix of shares, bonds, currency, property and cash. Normally any growth in the value of an investment fund would be subject to an exit tax of 30% - but this tax does not apply to pension investment funds. Free of tax, your pension fund gets the chance to grow faster and bigger than other types of investment funds. This tax-free growth is a significant advantage over placing your retirement money in a savings account where it would attract DIRT tax on the interest earned. Likewise, investing in property normally attracts Capital Gains Tax on the disposal of any property that is not your primary residence. Tax-free lump sum when you retire Upon retirement, the value of your pension fund is calculated. Usually you can then take a cash lump sum of up to 25% of the value of your pension fund. Of this lump sum you pay no tax on the first €200,000 and 20% tax on the next €375,000. The balance, 75%, must be used to provide you with an income for the rest of your life, but the tax-free lump sum is yours to do with as you wish. So, as you can see, planning for a secure and enjoyable retirement through a pension plan is one of the most tax efficient moves you can make. You get to enjoy the tax benefits from the moment you start a plan right up to the very end of your life. But before you make any move to start a pension it really pays to get the right advice. Although the tax benefits may differ little, not all pension plans are the same and starting a pension is one of the most important financial decisions of your lifetime. So make talking to your financial adviser your first step. Not only will they be able to talk you through the ins and outs of the various plans and providers available, but they can also give you more detail on the generous tax advantages of using a pension to plan for your retirement. 1 'Population Ageing in Ireland 2002-2021', National Council of Ageing and Older People, 2004.