Maximise your pension contributions

Maximising your pension contributions is a great way to provide you with an appropriate income for your retirement while minimising your tax bills. Indeed, it helps you invest a suitable amount of money into your pension and allows you to save money on taxes every year. 

Reduce your tax bill with your pension contributions

You should know that pension contributions provide a means of paying less income tax. Up to Revenue Limits, contributions to a pension fund qualify for relief from income tax. It means that where 40% is the higher rate of income tax if you are a higher rate taxpayer, a €150 contribution to your pension will only cost you €90 net. If you had not made the pension contribution, the other €60 would have gone to the government as income tax.

Another tax benefit of having a pension is the fact that they grow tax-free. Indeed, unlike investments in property or shares, for instance, your pension fund largely grows tax-free. At retirement, you’re able to take a lump sum of money completely tax-free or subject to a beneficial rate. The rest of the money, usually taken in the form of an ARF or an annuity, is taxable. However, many people find themselves in a lower tax bracket once they retire, so will have made a net gain from tax relief.

Pension contributions for personal pensions

The maximum amount that you can contribute to a pension in a year usually depends on 2 factors, your age and your income. Revenue applies percentage limits to an individual’s pension contributions based on age, as explained below. However, for the purposes of calculating maximum pension contributions, your earnings are limited to €115,000 per year. It also means that pension tax relief is subject to a salary threshold, which is €115,000. So only contributions deducted from the first €115,000 of your annual income are eligible for tax relief. Learn more here

Age            % limit of your income
Under 30                            15%
30-39                            20%
40-49                                  25%
50-54                            30%
55-59                            35%
60 & over                           40%

 

Example: Laura is 42 and earns €50,000 per annum from employment. Her maximum individual pension contribution is 25% of €50,000, so €12,500. Laura’s marginal rates of tax will depend on his personal circumstances, but a total marginal rate of 40% would be normal for someone on this level of income. Due to tax relief, making the €12,500 contribution to her pension will cost Laura a reduction of only €7,500.

Example: Adam is 62 and earns €300,000 per annum. Since retirement income is not a concern for Adam, he does not want to minimise his tax bill. His maximum contribution is however limited to €46,000,  40% of the maximum of €115,000.

Employers’ contributions to PRSAs

In Ireland, employers are not required to invest in a pension on your behalf. However, many employers contribute to a PRSA on behalf of their employees. However, you should know that they count as benefits in kind, and will be subject to income tax if their and your contributions are more than your tax relief percentage.

Example:  Yvonne is 43 and earns €54,000 per year. She contributes 10% of her salary, or €5,400 per year, to her PRSA. Her employer contributes 15% of the value of her salary, or €8,100 per year, to her PRSA. 

This total amount is 25% of her yearly salary which is Yvonne’s tax relief limit at 43, so she can benefit from tax relief on this amount.

Employers contributions to occupational pension schemes

Employer contributions to occupational pension schemes, as opposed to PRSAs, are subject to different limitations in relation to your earnings, service and how much money you currently have in your pension pot. The limitations are usually higher than the individual limits. Plus, this is useful if you are a senior employee, as you can use employer contributions as a means of increasing your pension contributions beyond the normal individual limits. 

Limitations on contributions to occupational pension schemes

Revenue sets limits on the total contributions of employers and employees to occupational pension schemes. For employees in occupational pension schemes, there are a number of rules that must be followed:

  • The maximum pension that you can receive from an occupational pension scheme is roughly 2/3 of your final salary. This limit may be lower if you have under 40 years of service at retirement and will be lower if you have under 10 years of reckonable service
  • Revenue caps the annual contributions you and your employer can make to an occupational pension scheme. Calculating these limits can be overwhelming, if you want to learn more about them get in touch with one of our financial advisors.  

What we do:

  • Help you set up a pension for free

  • Review your old pension and help you change if necessary

  • Check your current pension and see if they are at your best advantage

  • Evaluate if you can invest more money for your retirement

  • Help you turn your pension into income at retirement

Tell us more about your situation. 

 

Greenway Financial Advisors Limited is regulated by the Central Bank of Ireland. Registered No. C168372

Debbie Cheevers

Debbie Cheevers

Qualified Financial Advisor

Debbie was born in Dublin and graduated from NCAD with a degree in Visual Communication. She brings a strong customer services background to Greenway.

Debbie qualified as APA in 2017 and a fully qualified financial advisor (QFA) in 2018.

She believes that product knowledge is key to helping customers make the right choices.