As investments go, your pension is highly tax-efficient
Published 26/10/2015 | 02:30
Putting money into a pension is one of the most tax-efficient investments you can make.
This is the case whether you are an employer or an employee.
Premiums paid by an employee to a Revenue-approved pension scheme, or by a self-employed person under a Retirement Annuity Contract (RAC), are allowed as an income tax deduction in the calculation of an individual's income tax liability.
This is why the pension deduction is so valuable - it gives relief at the individual's top rate of income tax, according to director of taxation at Chartered Accountants Ireland, Brian Keegan.
This means that if you pay income tax at 40pc, then you get tax relief at this rate for investing in a pension fund. So you can put €100 into your pension fund at a net cost of €60.
If you are taxed at 20pc, then you get tax relief at that rate.
And a tax-free lump sum of up to €200,000 can be taken on retirement.
"Of course there are restrictions," Mr Keegan says.
The maximum allowable deduction depends on both your age and your earnings and there are special rules for calculating the earnings limits. In general, there is an earnings cap of €115,000, says Mr Keegan.
And it is worth noting that any growth in the value of the amount you have put into your pension fund is largely tax-free.
"So the growth in the value of your fund mainly accrues to you," Mr Keegan said.
But he warned that once the value of your fund goes over a certain level, currently €2m, tax penalties can apply.
"That won't trouble most of us, who haven't been sufficiently prudent with careers to achieve that level of pension fund."
People who are considering putting money into a pension are warned to get professional advice particular to their circumstances.
And the good news for those funding a private pension is that the controversial levy on private pensions is being scrapped.
Hundreds of thousands of people who were members of private sector pension schemes across the country were being hit with the levy, which was supposed to be a temporary measure due to finish in 2014.
Finance Minister Michael Noonan said in this month's Budget that the controversial measure had been rolled out to offset the reduced rate of VAT as well as other job-creation measures.
"So I can confirm that the remaining pension fund levy of 0.15pc introduced for 2014 and 2015 will end this year and not apply in 2016," he said.
The levy has reduced the size of pension funds of those who are yet to retire and has lowered the payments to those who have already retired.
The levy was originally applied at a rate of 0.6pc every year on the value of pension assets.
But the minister decided to increase the levy to 0.75pc of the assets of pension funds for 2014 and then to impose it at 0.15pc up to 2015.
In Budget 2015, Mr Noonan was accused of going back on his word by opting to retain the levy for another year. But he confirmed at that stage that it would be phased out.