“If you fail to plan, you are planning to fail”
A 2020 publication from the Central Statistics Office stated that only 60% of workers aged 20 to 69 have some of form of pension. Of 40% with no pension, the main reasons cited were that they either didn’t get around to it, couldn’t afford it or thought other sources offered a better rate of return.
From a tax perspective, its hard to think of a more efficient means of investing. On the way in, personal contributions should qualify for tax relief at the top rate of 40%, subject to certain restrictions relating to the individuals age and level of earnings. While in the pension fund, the investment benefits from tax free growth. Finally, on exit, it’s possible to access up to 25% of the value of the fund in a lump sum with a maximum amount of €200,000 received tax free and a further €300,000 subject to tax at only 20%. This would mean that there is a possibility for an individual to receive a lump sum payment of up to €500,000 at an effective tax rate of 12% – which is very attractive given the current marginal rates of income tax of up to 55%! The remainder of the pension fund may then be drawn down year on year or used to purchase an annuity. Any such drawdowns would be subject to income tax at the recipient’s marginal rate as normal.
Another advantage of pensions is that there is significant scope for employers to make contributions to their employees’ occupational pension schemes. These contributions are typically not taxable for the employee and not subject to employer PRSI and so offer a very worthwhile and tax efficient form of remuneration.
As is said, nothing is certain in life except death and taxes – as such, it is worth noting that pensions can provide valuable estate planning opportunities also. For example, if the holder of an ARF passes away, the ARF may become part of the estate and pass to the surviving spouse and children.
With the upcoming personal tax deadline on 10 December 2020, now is the perfect time to review your pension. If you would like to discuss the tax efficiency of making contributions or tax planning in general, please contact either Gordon, Gerry, Eamonn or Gillian in the tax team.