Brendan Burgess
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This post is aimed at self-employed, but the same principle applies to those on PAYE.
Tax relief is still available at 41% on pension contributions for 2011 and they can be backdated to 2010. Maximum advantage should be taken of this in 2011, as the 4 year plan proposes to reduces tax-relief to 20% between 2012 and 2014.
Tax relief is still available at your marginal rate e.g. 41% or 20% or 0%
You don’t get relief from PRSI or the USC in respect of 2011 payments.
You will get it in respect of pension contributions made in 2011 in respect of 2010 tax year.
The tax treatment of pensions may well change over the coming years. Likewise, marginal tax rates may rise or fall. This post is based on the current treatment and changes planned in the 4 year plan. The new government may have other changes in mind.
The fund will accumulate tax-free
As of now, there are no taxes on investment income received within the pension fund. This may change.
Tax rate on income from a pension fund in retirement (i.e. annuity or ARF drawdown)
marginal tax rate on retirement income |41% |20% | 0%
USC | 4%|4%|4%
PRSI|4% |4%|4%
Total|49%|28%|8%
@ 75%|37%|21%|6% Explanation: On retirement, you will get 25% of your fund tax free. The remaining 75% will be taxed at 49% if you will then be on the 41% tax rate. This means that the net tax rate will be 37%.
Note: I am assuming that PRSI or its equivalent will be payable on income in retirement in future years.
If you are a 41% tax payer this year, you will get relief at 41% and the maximum tax rate on your retirement income will be 37%. It may be as low as 6% - so it's still great value.
If you are a 20% tax payer, you should only contribute to a pension fund, if you are very certain that your marginal rate of tax on income will be 0%.
So if you are approaching retirement and if you will have no other income on retirement, then consider contributing to a pension fund.
If you have many years to go to retirement, your income on retirement may well be taxed at 41%, so don’t contribute to a pension. If your income rises over the coming years, you may start paying 41% tax and you would get better value for your pension contributions then.
Predicting your tax rate on retirement
A single person can earn up to €32,000 at the 20% tax rate. If your pension is your only source of income at that stage, a pension fund of €600,000 at 5% drawdown would pay €30,000 a year. If you have rental income or dividend income or a pension from some other source, then you would need a much smaller pension fund on retirement to bring you into the 41% tax bracket.
Factors to consider when deciding to contribute to a pension
You need the cash flow
Lack of accessibility
Summary of rules for 2011
Maximum allowable pension fund: €2.3 million ( exemptions for those with existing funds in excess of this)
Earnings limit : €115,000 ( this also applies to payments made in 2011 and backdated against the 2010 tax.)
Maximum contribution as a percentage of salary
Up to 29| 15%
30 – 39|20%
40 - 49|25%
50 – 54|30%
55 - 59|35|%
60 +| 40%Acknowledgement: Thanks to Liam Ferguson for his comments on an earlier draft
Tax relief is still available at 41% on pension contributions for 2011 and they can be backdated to 2010. Maximum advantage should be taken of this in 2011, as the 4 year plan proposes to reduces tax-relief to 20% between 2012 and 2014.
Tax relief is still available at your marginal rate e.g. 41% or 20% or 0%
You don’t get relief from PRSI or the USC in respect of 2011 payments.
You will get it in respect of pension contributions made in 2011 in respect of 2010 tax year.
The tax treatment of pensions may well change over the coming years. Likewise, marginal tax rates may rise or fall. This post is based on the current treatment and changes planned in the 4 year plan. The new government may have other changes in mind.
The fund will accumulate tax-free
As of now, there are no taxes on investment income received within the pension fund. This may change.
Tax rate on income from a pension fund in retirement (i.e. annuity or ARF drawdown)
USC | 4%|4%|4%
PRSI|4% |4%|4%
Total|49%|28%|8%
@ 75%|37%|21%|6%
Note: I am assuming that PRSI or its equivalent will be payable on income in retirement in future years.
If you are a 41% tax payer this year, you will get relief at 41% and the maximum tax rate on your retirement income will be 37%. It may be as low as 6% - so it's still great value.
If you are a 20% tax payer, you should only contribute to a pension fund, if you are very certain that your marginal rate of tax on income will be 0%.
So if you are approaching retirement and if you will have no other income on retirement, then consider contributing to a pension fund.
If you have many years to go to retirement, your income on retirement may well be taxed at 41%, so don’t contribute to a pension. If your income rises over the coming years, you may start paying 41% tax and you would get better value for your pension contributions then.
Predicting your tax rate on retirement
A single person can earn up to €32,000 at the 20% tax rate. If your pension is your only source of income at that stage, a pension fund of €600,000 at 5% drawdown would pay €30,000 a year. If you have rental income or dividend income or a pension from some other source, then you would need a much smaller pension fund on retirement to bring you into the 41% tax bracket.
Factors to consider when deciding to contribute to a pension
You need the cash flow
Lack of accessibility
Summary of rules for 2011
Maximum allowable pension fund: €2.3 million ( exemptions for those with existing funds in excess of this)
Earnings limit : €115,000 ( this also applies to payments made in 2011 and backdated against the 2010 tax.)
Maximum contribution as a percentage of salary
30 – 39|20%
40 - 49|25%
50 – 54|30%
55 - 59|35|%
60 +| 40%