In every conversation I have with clients about retirement planning, two questions are always asked:
- Should I start a pension now?
- How much should i invest?
My personal opinion on the first question is that it depends on the personal and financial circumstances of the individual at the time. For example, if you are saving for a mortgage or want to raise a family, those costs become more important in the short term and perhaps it is best to defer your retirement.
However, if you are able to invest excess income / cash, an annuity offers you a tax-efficient savings plan for your retirement savings. This leads to the second question, how much should I invest?
Pension investments are very tax-efficient compared to a normal savings plan. The difference is that you get a tax break based on the highest income tax rate you pay. For example, a person who pays income tax of 40% of their income receives a tax reduction of € 40 for every € 100 invested (or € 20 if they pays 20% income tax). Hence, when considering how much to invest in a year, make sure that you get the maximum tax efficiency from this post.
However, the amount of tax relief for annual pension contributions is limited based on the income and age of the pension contributor in that year.
Relevant net income (NRE) The relevant net income is the relevant income (income from employment, income from self-employment) minus losses, allowances and fees that are offset against the taxable income of a natural person in a tax year.
Rental income or investment income such as interest on deposits / dividends are not included in the relevant income and can therefore not be taxed on the pension contributions made.
In addition, the tax-deductible net profit has been limited to € 115,000 in recent years. For example, a 35-year-old taxpayer who earns € 150,000 per year can claim a tax reduction of € 23,000 pension contribution (€ 115,000 * 20%).
If a natural person is restricted in terms of tax relief in one year due to the above-mentioned limits, this excess contribution amount can be carried over to future years.
Contributions from natural persons to their private pension funds (incl. AVCs) before October 31 (or later if ROS registration) in a year can be used to claim tax relief for taxes paid in the previous year. For example, a top taxpayer (40%) who was born before October 31, 2021 (or ROS online -17. This would result in a net cash outflow of € 6,000 in October 2021.
In addition to the tax relief for private old-age provision (PRSA, RAC), in which the employer of a natural person contributes to the employee pension as part of a company pension scheme, the natural person is not subject to taxation on the contributions made by the employer.
This does not result in any taxable benefit for the employee. One of the main advantages of company pension schemes is that the employer’s contribution does not reduce the employee’s own tax exemption limit mentioned above. However, the employer’s contributions to the company pension scheme must be within the prescribed limits. This is in contrast to employer contributions to a PRSA, which are combined with the employee’s own PRSA contributions to calculate the employee’s maximum tax relief limit.
As part of the company pension scheme, the employer usually sets contributions to which he pays into the employee’s pension fund. The employee then pays his own contributions to the fund based on a set percentage of his salary. If an employee wishes to increase their own contributions to the fund, they can do so by making additional voluntary contributions (AVCs) to the fund. Again, the employee must be aware that such AVC payments should be within the above tax relief limits to ensure that the contribution is made most efficiently.
The majority of holders of a private pension or a PRSA should be entitled to withdraw a maximum of 25% capital from the fund upon retirement. In certain cases, holders of a company pension scheme should be able to receive 1.5 times their last salary as a one-off payment.
Currently, the maximum lump sum that a person can receive tax-free is € 200,000. This is a lifelong limit and therefore applies to all pension funds together, regardless of whether the lump sum is drawn by the person at different times from different pension funds.
For natural persons whose lump sum exceeds € 200,000, they can receive the next € 300,000 (€ 500,000 to € 200,000) at a tax rate of 20% VAT.
You can use the assets of your pension fund to buy a life annuity (lifetime income), an ARF or, alternatively, a taxable lump-sum payment. Taxation on annual pension payments or ARF / AMRF earnings will then become taxable based on the person’s annual income at that time.
Retired Family Business Owners All too often we treat our businesses like family, and like family we hope that they will continue to grow and develop and be even more successful when we are gone. And it is precisely at this point that I find that old-age provision is a welcome way of separating business assets from being passed on to the next generation.
Many retirement entrepreneurs often worry that the business they are parting with will need the money built to continue or expand. This view often leaves the owner feeling a little guilty at the suggestion to pull out the company’s own cash reserves to support them in retirement.
However, entrepreneurs never consider a pension fund as part of their business assets and for this reason alone offers retired entrepreneurs who find themselves in such dire straits additional financial security.
In a country with an aging population, it is inevitable that the state pension will come under more pressure at some point. These pressures may very well lead to lower pension rates or higher retirement ages for citizens. So if you want to secure your own old-age provision, a private old-age provision is certainly a tax-relieving option.
Brian Harty from Harty Tax Consulting.