Pensions: The Tax Implications
There is an old saying that death and taxes are the only two certainties in life. But when it comes to pensions, there is a lot of uncertainty among the general public.
We want to enjoy financial security for ourselves and our family before (and after) death. But when we try to predict our cash flow during retirement, taxes can add to the confusion about our income expectations.
It’s always a good idea to sit down with an independent financial adviser to discuss your pension arrangements, especially when you get closer to retirement.
Remember, your annuity or lump sum drawdown may have tax implications if they propel you from a lower (or zero rate) tax band into a higher one.
Here is a general guideline as to what you can expect when to comes to tax rules on pensions in Ireland.
Both the Contributory and Non Contributory State pension are subject to income tax (PAYE) and the usual tax credits apply. There are no deductions for USC or PRSI.
Income from occupational pension schemes is taxed in the same way as a salary. Company pensions (whether Defined Benefit or Defined Contribution) are subject to USC but not PRSI. However, those aged 66 and under, may have to pay PRSI on any other sources of income.
There are generous tax reliefs available to help you build up your pension fund throughout your working life. Your employer’s contribution to your pension is not subject to the Benefit In Kind (BIK) tax. If your employer does not have an occupational pension scheme, you can set up a Private Retirement Savings Account (PRSA). Where an employer contributes to a PRSA, this is treated as a BIK but is not liable for USC or PRSI.
If you are self-employed, talk to a financial adviser about whether a PRSA or a Retirement Annuity Contract (RAC) is the best option. You can claim tax relief on contributions to Revenue-approved private pensions.
Most people will choose to take a tax-free lump sum from their pension when they decide to retire. A maximum of 25% of the value of the fund (in the year of payment) can be withdrawn and for tax purposes, this is subject to a lifetime limit of €200,000. The next €300,000 is subject to 20% tax with any further monies facing 40% income tax plus 8% USC.
If you are no longer working but have other sources of income (from rental property or share dividends, for example) then you are classed as self-employed and your tax is payable annually by October 31 each year. This includes income from abroad.
TAX EXEMPT PENSIONS
Income from certain sources is exempt from tax. These exceptions include ex Army staff on wound and disability pensions and certain foreign pensions that would not be taxable if the recipient lived in the country that granted them.
Do you fancy retiring somewhere sunny? If you move to a country that has a Double Taxation Agreement with Ireland (like Spain, for example) you may be exempted from Irish tax but will usually be liable for tax in your new country of residence. Keep Revenue informed of any change in your circumstances.