Pensions and taxes are on the bottom of the average persons ‘life admin’ list. We don’t know that for a fact, but ask anyone and they will confirm that other than Budget 2022 announcements, most of us avoid the two topics.

However, what if there was a benefit to discussing pensions and taxes once a year? (The benefits are numerous at any time of year, but particularly in October).

How are pensions, tax and October related? The answer is straightforward:

Making contributions to a pension plan could be the answer to reducing your tax bill. Making a contribution to a pension plan before the 31st October each year allows you to claim tax relief for the previous year.

Important Deadlines

October 31st (or 17th November 2021 if you use the Revenue Online Services (ROS) to pay your tax bill), is the final date on which you can claim tax relief on backdated pension contributions. In other words, this is the last chance to get some money back from the tax man for 2020. (Cheques must be received by October 29th)

If you are a PAYE employee and you save a lump sum Additional Voluntary Contribution (AVC) by cheque/Direct Debit and claim tax relief on this AVC by 31st October you can get tax relief in respect of the previous calendar year.

Example

Additional Voluntary Contribution paid 25 October 2021:       €2,000

Reduction in 2020 tax bill (40% tax payer):                                 € 800

Actual cost to you of additional €2,000 into your pension:      €1,200

Self-employed people can also claim back some tax:

Let’s say you have a bill of €10,000 for 2020 and preliminary tax of €10,000 for 2021 to pay by 31st October 2021. You could pay Revenue the €20,000 and this job is done for another year or you could make a payment of €5,000 to your pension. This will have the effect of reducing last year’s tax bill by 40% of that €5,000 (i.e. €2000). As preliminary tax for 2020 is 100% of last year’s bill, you also reduce the preliminary tax by the same amount (i.e. €2,000).

Where would you like to see your money going?

You could pay Revenue €20,000 or you could put €5,000 in your pension and pay Revenue €16,000 (i.e. €20,000 – €2,000 – €2,000). Your total spend is only €1,000 more but for that extra €1,000, you pay Revenue the amount due and also have €5,000 in your pension fund –you are ahead now and setting yourself up for retirement!

The following table shows the percentage of your income that you can get tax relief on when contributing to a pension plan, depending on your age and subject to a current maximum annual earnings amount of €115,000p.a.

Saving for your retirement is tax efficient

As well as tax relief, the funds in which your contributions are invested currently benefit from tax-free growth, unlike most saving methods which may be liable for DIRT Tax or Capital Gains Tax. This means pension funds benefit from being able to reinvest the non-taxed returns to generate higher future returns and should build up quicker than a fund that has to pay tax on its investment returns.

In addition, when you retire, you can take part of your pension fund as a tax-free lump sum. The amount you can take depends on the type of pension plan you have in place. It is important to remember that your regular pension income or Approved Retirement Fund ARF may be subject to tax.

To learn more about your pension options, get in touch with us today. Whether you are a company director, self-employed or PAYE worker, we can help.

Budget 2022 contained few surprises. There was a lot of talk in the run up to the 12th of October and the Government gave clear signals in advance. The Government is confident that there is something for everyone in the audience, with many pundits likening it to the Late Late Show giveaway.

It has now been announced that individuals in receipt of the State Pension will receive a €5 weekly increase. This will see pensioners receive a weekly payment of €253.30 from January 2022*, instead of the lower, €248.30 per week which they currently receive. Around a third of all workers rely solely on the State pension for their retirement income.

While generous, consider how much your weekly income will drop if you are reliant on the State Pension. Can you afford to reduce your income to that extent? You might have paid off your home and your current dependants may no longer need your financial support – but is €253.30 enough for you to live on for the rest of your life? With a retirement age of 66 currently, people can expect to live (and draw down a State pension), for close to 20 years in retirement, half as long as their full working lives.

Are you looking to work until you are 68 years old?

There was little talk of the pension age in the budget this week, but it is worth a mention. While the Commission on Pensions recommended the State Pension age to remain at 66 until 2028, the 2011 Pension Act put Ireland on course to have the highest pension age in the OECD in 2028, despite the youth of our nation*. Under new recommendations discussed in Cabinet recently, the State reviewed the possibility of increasing the pension age by three months every year from 2028. Under these recommendations, the pension age would reach 67 in 2031 and 68 from 2039. It might seem like a lifetime away, but as a professional working in the construction or related industry, can you imagine working until the age of 68?

Consider this – those looking to retire in 2051 are people in their mid-thirties now and will be looking to retire around then.

If you are not sure whether the State Pension provides a sustainable life for you and your family – the best thing to do is reach out and get proper guidance. While the best time to start a pension has come and gone, the second best time is now.

The best time to start planning for your future…

CPAS administers a number of pension schemes, ensuring there is a pension scheme that suit the needs of your business – whether you are self employed or running a large company. Contact us to get started. There are no obligations, no complicated jargon – just clear facts to help you get started.

 

 

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