June 20, 2024
Whether you’re self-employed, part of a company pension scheme, or working in non-pensionable employment, the importance of saving for retirement is undeniable. One of the significant benefits of saving through a pension is the tax advantages provided by the government. In this blog, we’ll explore these tax-saving benefits and demonstrate why pensions are one of the most tax-efficient forms of savings.
How Pension Contributions Can Reduce Your Tax Bill
Q1: I’m self-employed. How much can a pension contribution reduce my tax bill?
If you’re self-employed and in the 40% tax bracket, a €10,000 pension contribution can reduce your tax bill by €4,000. This is because your contribution is deducted from your taxable income.
Q2: Is there a limit to how much of my earnings I can contribute and for which I can claim tax relief?
Yes, there are age-related contribution limits:
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Under 30 years: 15%
30-39 years: 20%
40-49 years: 25%
50-54 years: 30%
55-59 years: 35%
60 years or over: 40%
Many US pension & investment custodians will ask you to move your account if you cannot show a US address anymore. This can have a range of knock on impacts if you are being forced to access pensions before 59 1/2 years of age or forced to sell investment before you want to. There are a small handful of solutions though that are SEC regulated and available to US Citizens in Ireland.
Q3: Is there an earnings cap?
For 2022 and 2023, the maximum earnings that qualify for personal tax relief is €115,000, regardless of age.
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Company Pension Schemes and Additional Voluntary Contributions
Q4: What if I am an employee in a company pension scheme?
The same age-related limits apply. Personal contributions include both your mandatory contributions and any Additional Voluntary Contributions (AVCs). Employer contributions can be made in addition to these limits.
Q5: What is an AVC?
AVCs are additional contributions to a company pension scheme that exceed the required amount. They qualify for tax relief at your marginal rate.
Q6: Why should I consider making an AVC?
Apart from tax savings, AVCs help increase the size of your pension pot for retirement.
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Personal Retirement Savings Accounts (PRSAs)
Q7: What if my employer makes a pension contribution to a PRSA?
Since January 1, 2023, employer contributions to a PRSA are not considered a Benefit-in-Kind and do not count towards the age-related limits for personal contributions. This allows for additional employer contributions beyond the employee limits.
Claiming Tax Relief on Pension Contributions
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Q8: How do I claim tax relief for pension contributions?
You can adjust your tax credits online through Revenue.ie. Regular contributions can provide immediate tax relief in the current tax year.
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Q9: How can self-employed individuals backdate tax relief on a pension contribution?
Self-employed individuals can backdate tax relief for a lump sum contribution to the previous tax year if the contribution is made before October 31st of the following year, or November 15th if filed online via ROS.
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Q10: For how many years can I backdate pension contributions?
Tax relief can only be backdated to the previous tax year, provided the contribution is made and the election is filed before the respective deadlines.
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Q11: Can unused tax relief be carried forward?
Yes, unrelieved contributions can be carried forward to subsequent years.
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Q12: Are there additional incentives for the self-employed to make pension contributions?
Reducing your tax bill for the previous year also reduces your preliminary tax for the current year, offering a double benefit.
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Q13: When should I make a lump sum contribution?
Lump sum contributions should be made before the tax deadline to qualify for backdated tax relief.
Tax Treatment of Pension Funds
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Q14: Are pension funds subject to capital gains tax?
No, the investment growth in pension funds is not subject to capital gains tax. However, pension benefits taken during retirement are taxable.
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Q15: How much of my pension will I receive tax-free upon retirement?
You can take 25% of the accumulated fund as a tax-free lump sum, up to a lifetime limit of €200,000.
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Q16: Is there a limit on the lump sum you can take?
Yes, the tax-free lump sum is capped at €200,000. Any amount above this is taxed at 20%.
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Q17: What if I have multiple pension pots?
The €200,000 tax-free limit is a lifetime cap and applies cumulatively across all your pension pots.
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Q18: What happens after taking my tax-free lump sum?
The remaining balance must be transferred to an Approved Retirement Fund (ARF) or used to purchase an annuity, with withdrawals taxed at your marginal rate.
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Q19: Why do pensions receive favourable tax treatment?
The government incentivizes long-term savings for retirement by offering significant tax advantages to make pension savings attractive.
Conclusion
Saving for retirement is crucial, and utilizing pension schemes offers substantial tax benefits. By understanding and taking advantage of these benefits, you can ensure a more financially secure future. Whether you’re self-employed or part of a company scheme, it’s never too early to start planning for retirement.
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Contact us today at hello@imperiuswealth.com to arrange a no obligation consultation.
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