Sunday 26 January 2020

How pension top-ups work

FORMER finance minister Brian Cowen introduced a pensions cap of €5m in the 2006 Finance Act.

It was in response to concerns among officials in the Department of Finance that high earners were getting pension tax benefits that were too generous.

The €5m cap meant that any contributions to executives above that sum would be effectively taxed on the double.

One example given by tax experts was the case of an executive whose pension fund climbed up to €8m in value. The €3m in excess of the €5m pensions cap would be hit by a 41pc income tax charge, plus the higher income levy of 3pc.

And there would also be a second income tax charge of 41pc, plus the higher income levy of 3pc, on what was left of the €3m. This would mean the executive would be taxed twice on the sum exceeding the cap.

But by getting their pension contributions in the form of cash allowances, bank bosses only have to pay the 41pc income tax rate and the 3pc income levy on them just once -- therefore saving a substantial amount of tax.

They are free to invest the pension contributions in whatever way they wish.

Irish Independent

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