Your Tax Treatment In Retirement
You don’t stop paying income tax when you turn 65 but there are extra credits available to older people that need to be factored in while planning your pension. Whether you’re single or married, it’s important to understand what Revenue will give you – and what it will take away.
All payments from pensions in Ireland are subject to taxation but many pensioners end up owing zero tax as their income is too low. Those aged 65 and over pay no tax if their income is under €18,000 (for single, widowed or surviving civil partners) or €36,000 (married or in a civil partnership). They are also entitled to tax relief of €575 for each of their first two children and €830 for each subsequent child. Furthermore, over 65s can also claim a tax credit of €245 (single) and €490 (married). If their income exceeds the exemption limit, but is less than twice the limit, they can usually avail of “marginal” tax relief. This means paying 40 per cent tax on income in excess of €18,000, instead of on their entire earnings. Outside of the above exceptions, retired people must pay tax under the PAYE system, just like the working population.
Any pension lump sum over €200,000 will be subject to income tax with the next €300,000 taxed at 20% and the balance at 48% (40% income tax and 8% USC).
Pensions are subject to the Universal Social Charge (USC) but when you turn 70, you can avail of a reduced USC rate (as long as your income is no more than €60,000). Instead of paying 4.5% on income above €13,000, you pay 0.5% on the first €12,012, and 2% on the balance. Medical card holders will already have been paying a lower USC rate. You do not have to pay PRSI on any income if you are age 66 or over (this includes rental income etc). Private occupational pensions are not subject to PRSI, no matter what age you are.
Once you retire, Revenue applies a tax (known as imputed distribution) every year as a percentage of the value of your ARF or PRSA fund, on the assumption that you are withdrawing cash to fund your retirement. This levy is 4% if you are 60 years or over, 5% if you are 70 years or over or 6% if you have pension assets of €2 million or more and are over 60 years of age for the full tax year. Any payments from an ARF, AMRF or PRSA are subject to income tax, PRSI (unless you over 66) and USC. Payments from an annuity are also subject to income tax, PRSI (unless you over 66) and USC. Pension administrators must apply tax at the marginal rate (40%) unless they have an up-to-date Tax Credit Certificate so it’s important to apply for one as soon as you retire.
If you retired abroad and there is a Double Taxation Agreement, you may be exempt from Irish tax (but usually liable for local tax). You must notify your pension fund in Ireland or it will automatically deduct PAYE in the usual way.
FOREIGN PENSION OR INCOME
If you live in Ireland but receive a foreign pension that would not be taxable if you lived in the country granting it, then you will not have to pay tax here either. Otherwise, if you have a social security pension from abroad, it is also generally taxable in Ireland, as is any income from abroad.
OTHER TAX RELIEFS
The household benefits package for those aged over 70 is not means tested and helps with the cost of fuel as well as the TV licence. It is worth around €580 a year. If your income is below the tax threshold and you are aged 65 or over, you are exempt from Deposit Interest Retention Tax (DIRT) on your savings. If you are dependent on the care given by a son or daughter as a result of old age or ill health, you can claim Dependent Relative Tax Credit through a DR2 form at Revenue.ie
If you retire at 65 and cannot claim the State pension until 66 (at present), 67 (from 2021) and 68 (from 2028) you will be entitled to jobseeker’s benefit. It is normally available for nine months and you get a PRSI credit for every payment. These credits could help you obtain the 156 PRSI contributions necessary to claim the State (Contributory) Pension.