Expert Pensions

Pensions: The Facts on Tax

You might think you are too young to start a pension. But imagine if there was a cash machine that gave you free money every month — you’d want to use it as soon as possible.

Tax relief on pensions is another way of getting some “free” money from the Government.

Politicians want workers to start saving for their retirement as early as possible so they offer generous tax relief in a bid to make that happen. 

That’s why one of the most effective ways to put more money in your pocket is to invest in a pension.

A pension delivers a double bonus when it comes to reducing your tax bill.

Firstly, you receive income tax relief at the marginal rate (so if you pay 40% tax and contribute €500 into a pension fund every month, effectively it only costs you €300).

Secondly, you do not pay tax on the growth of your pension fund. For example, If you put just €50 a week into your pension between the ages of 20 and 25, and never touched it again, it would be worth €197,000 by the time you retire. That’s due to the magic combination of compound interest and tax free growth.

There is a limit to the amount of tax relief you can claim on earnings in any one year for pension contributions.

For those under 30, it’s 15%, aged 30-39 it’s 20%, aged 40-49 it’s 25%, aged 50-54 it’s 30%, aged 55-59 it’s 35% and aged 60 or over, it’s 40%.

For example, an employee who is 27 and earning €28,000 can get tax relief on annual pension contributions up to €4,200.

If you don’t start a pension fund until your 40s, you will have less time to build it up. So you will have to put far more money in to give you the same pension you would have had if you started saving in your 20s.

If you are a PAYE worker, your employer will deduct any pension contributions directly from your pay, and will give you the tax relief due. 

If you are self-employed, you must include your pension contributions in your online self-assessment tax return to obtain income tax relief. 

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