How does the area of pensions and tax relief work? Bottom line is that the State will incentivize you to save for your retirement by allowing you save some of your gross salary (i.e. income before tax is applied) in to a pension plan.
How much tax relief can I avail of?
Each individual is allowed tax relief based on their age and percentage of their salary.
Know your limits!
Don’t be greedy! The maximum salary you can claim relief on is €115,000 p.a. Therefore if your income is €500k p.a., you can still only claim relief up to the first €115,000 p.a.
If you are a member of a Company Pension scheme and your employer is making a contribution to your pension, this is NOT included in your salary limit (so you probably have plenty of scope to contribute up to your limit).
If you are a member of a Company PRSA Scheme and your employer is making a contribution to your pension, this IS included in your salary limit (so be careful not to exceed your limit).
Sounds good? There are even more tax benefits...
When you contribute to your pension, the money is invested in a fund where it is allowed grow TAX FREE! Unlike a deposit account where the growth is taxed annually, a pension fund can grow without the burden of the growth being taxed. This cumulative tax free growth is the key ingredient in your pension fund, providing you with a long and happy retirement.
What about the tax when you want to retire?
The tax relief doesn’t stop just because you want to retire! There are a few options but in general, the day you retire you can get at least 25% of your total pot transferred in to your bank account TAX FREE!
The balance of your fund can remain invested and grow TAX FREE!
Whenever you do drawdown on the balance of the fund you are liable to income tax. However, there are various structures and ways to minimise the tax liability at that point.
What if I die and I haven’t spent all of my pension fund?
Even on death your pension can be tax efficient!
If you die and still have a pension fund (pre or post Retirement) it doesn’t die with you. Instead, your family can inherit your pension in a much more tax efficient way than if you had left them a property or money in a bank account.
So in summary you can get…
Tax relief on your pension contributions
Tax free growth on your pension fund
Tax free growth on your retirement fund until you draw it down
Tax efficient access to your pension fund throughout your retirement
Tax efficient transfer of your funds to your estate on death
Tax free lump sum at retirement age
With all aspects of Personal Financial Planning, it is important to get professional impartial advice that is specific to your own needs and circumstances.
For an initial chat to see if we are suited to working with you, simply get in touch.
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We have been working with Coleman Financial Planning since early 2016. We both have a number of pensions from previous employments, and weren’t sure that we were maximising our return – or unnecessarily duplicating on fees. Daragh undertook a full review and came back with recommendations. We have made some changes e.g. consolidating funds where it made sense. We feel we are in safe hands with an expert who doesn’t try to blind you with science or numbers. We know that someone will now be looking at annual statements who understands them, and will work with us to secure our financial future