Its important to save for a pension in order to maintain your standard of living when you retire and are no longer earning a wage. A pension plan is a savings plan with the added advantage of generous tax benefits. Number of different pension arrangements incl Personal Pension, PRSA’s, Company schemes, AVC, Buy out Bonds, Annuities, ARF’s. Are you eligible for the state pension ; would you survive on it as your sole source of income?.
Tax relief on Personal Contributions
Under 30 15% of NRE (Earnings)
30 – 39 20% of NRE (Earnings)
40 – 49 25% of NRE (Earnings)
50 – 54 30% of NRE (Earnings)
55 – 59 35% of NRE (Earnings)
60 and over 40% of NRE (Earnings)
Maximum net relevant earnings limit applies. & fund limit applies.
Tax Relief – Salary deduction
Tax relief at marginal rate. Employer does not deduct tax on the portion of your salary that is paid in to a pension.
Tax Relief – Direct, not by salary deduction
Apply to revenue for Tax Credit – tax credits adjusted by employer.
AVC Additional Voluntary Contributions
If you are in a company pension and have spare tax relief you can set up an AVC – Additional Voluntary Contributions. Tax relief is the same as personal pensions. The AVC pension is set up and managed by you.
Buy Out Bond
If your Company pension scheme is wound up or you leave service, the fund can be transferred to a buy out bond. You can access this pension from age 50
Personal Retirement Savings Account—PRSA
Personal pension plan where employers can also contribute to.
Tax relief on company pensions.
The same tax relief limits apply for employees, both the company and the employee can make contributions. No BIK on company contribution.
Tax relief is at source .
Tax Relief on Executive Pension
Company owners and directors can have their company pay the contributions, this is classed as a company expense. Tax relief limits do not apply, ie does not have to be a % of salary and the company can max fund the pension. No limit on the size of the fund but amount of tax free lump sum will depend on the salary on retirement and on revenue limits. Need to perform max funding calculation.
Taking Retirement Benefits
On retirement you will be entitled to a tax free lump sum. The remainder of your pension fund will be paid out either as an annuity, ARF or taxable sum.
Approved Retirement Fund
Pension fund used after retirement, only taxed when drawndown funds.
Life company will guarantee to pay an annual pension for life in exchange for a lump sum payment.
Depending on your age and risk profile you can invest in high or low risk funds. The default strategy tends to invest in high risk & return funds at the out set and gradually reduce the risk the nearer you get to retirement.
Defined Benefit Pension—DB Scheme
The retirement benefits are set at the outset, you a guaranteed a specific pension as a % of your salary on retirement.
Defined Contribution Pension—DC Scheme
The retirement benefits are dependent on the valuate of the pension fund on retirement. Fund value varies with investment performance and level of contributions.
Old Age Pension
Contributory pension: Automatically entitled to state pension at age 66, once you have made enough PRSI contribution while working. Non—contributory pension: state pension is means tested not automatically entitled at age 66 if you have not made PRSI contributions.
Note: This is a summary and there are further options
The following video gives a quick explanation on how pensions work