Pension contributions in Ireland

There is no one-size-fits-all answer to this question. It will depend on your personal circumstances. As we saw above, age often plays a huge role. The type of pension arrangement will also be an important factor.

However, many people have a rough idea of what they would like to have in retirement. Unfortunately, the reality does not always match this figure.

How much you will need to retire will depend on many factors. We have written a blog on this topic in detail which should give you a guideline.

The amount you contribute to your pension will likely depend on what type of pension arrangement you have.

There are several different types of pension arrangements. These consist of various arrangements within both personal and occupational schemes.

For example, you may be part of an occupational pension scheme. This may consist of the following:

• Defined Contribution (DC) pension scheme – This is where both yourself and your employer contribute to your pension. What often happens is that your employer will match your contribution. For example, you both contribute 5% of your salary for 10% total.

• Defined Benefit (DB) pension scheme  – These schemes are slightly different There is no calculation of contributions per say. Factors such as salary and years of service are considered which then calculate a lump sum/pension at retirement.

As a PAYE employee or a self-employed person, you have different pension options available.

• Executive Pension Plans – These pension arrangements are set up by a limited company for the benefit of company directors or employees.
• Personal Retirement Savings Account (PRSA) – A Personal Retirement Savings Account (PRSA) is a personally owned pension that gives you the opportunity to save for retirement. You have the ability to contribute whenever you like on a regular or irregular basis.
• Personal Pension – A Personal Pension plan is a personally owned pension held in your name. These types of pension plans are often popular among self-employed sole traders. They are also available to those with no access to an occupational pension scheme.

It is worth noting that all of the above will be eligible for income tax relief or can be offset against corporation tax depending on the specific arrangement.

No. In some circumstances, different arrangements change the maximum contribution limit. For example, the contribution limits on Executive Pension Plans are significantly greater.

This is an important factor when deciding on your pension arrangement and structure.

Below we see the maximum contribution thresholds for Executive Pension Plans. These are far greater than in personal pension arrangements.

It is worth noting that there is also a difference in maximum contribution levels allowed between male and females.

Personal pension plans have lower maximum contribution thresholds. Although, these do increase alongside age.

As a self-employed individual, you will have two choices with regard to a pension. The are the following:

• Personal Pension
• Personal Retirement Savings Account (PRSA)

Both of these have the same threshold with regard to contribution limits.

The maximum amount of earnings taken into account for both of the above while receiving tax relief is €115,000.

Additional Voluntary Contributions (AVCs) are extra contributions made by a member of a group pension scheme in order to increase their benefits at retirement.

If eligible, you will receive tax relief on these contributions.

AVCs are usually made by members who feel the benefits they will receive at retirement may not be sufficient.

Any member of a pension scheme has the ability to make an AVC. Once you decide on an amount, complete the relevant paperwork and submit it to your payroll department.

The AVCs are deducted directly from your salary. This means you will get full tax relief at the source.

AVCs are a popular choice for those working in the public sector. Some feel the benefits they will receive at retirement are not sufficient and would like to top up their pension fund.

There are many benefits to contributing to a pension arrangement. Without mentioning the government incentives, it will give you the ability to enjoy the lifestyle you would like in retirement.

You will also have the opportunity to take advantage of the magic of compound interest as your fund accumulates over time.

However, there are three key advantages to contributing to a pension which are:

As we have seen, your contributions to your pension will be eligible for tax relief. This means the ‘real’ cost of your contributions is lower.

The higher your income bracket, the higher rate of tax relief you will receive. For example, if you pay 40% income tax, you will receive 40% tax relief on your pension contributions.

The government provides these tax breaks to encourage us to save for the future. How much you contribute will depend on how much you need in retirement.

This number will vary depending on your personal circumstances and the lifestyle you would like to live.

Another major incentive to contribute to a pension is the fact your fund will grow tax-free. This means it will accumulate over time free of income tax, capital gains tax, or DIRT.

Avoiding these taxes which are currently at 33% can have a huge impact on your fund level.

The main attraction most of us associate with pensions is the ability to access a lump sum at retirement.

This means you can take a portion of your fund completely tax-free. The amount you can take will depend on the type of arrangement you have and any other lump sums you may have taken in the past.

Most people are eligible to take a 25% tax-free lump sum. Although, there is a limit of €200,00 that can be taken tax-free.

Once above this limit, there are thresholds that apply as we see below.

If you are considering taking a tax-free lump sum, it may be worth enlisting the help of an advisor to consider all potential options.

The type of pension arrangement you have will play a role in when you can access your lump sum. Some arrangements allow you to access it earlier than others.

Below we have broken down the eligibility by age and pension arrangement.

In certain circumstances, you may be able to access benefits earlier. Although this is quite rare and is usually only due to ill health.

There is a maximum lifetime limit on the amount of retirement benefits you can have from all sources. It is worth noting that this does exclude any State pension benefits.

This lifetime limit is the Standard Fund Threshold (SFT).

The Standard Fund Threshold is the limit on the total capital value of pension benefits that an individual can draw from tax-relieved pension arrangements which come into payment for the first time after 7th December 2005.

The current Standard Fund Threshold is €2 million. However, if an individual exceeds this €2 million threshold, they may apply for a Personal Fund Threshold (PFT) in advance of their retirement. 

The original Standard Fund Threshold was set at €5 million. However, this reduced to €2.3 million in 2011.

It was then further reduced to €2 million in January 2014. If an individual has benefits which exceed a capital value of €2 million, the excess will be subject to 40% tax liability.

It has never been easier to set up a pension and start contributing. There is the option of completing the process digitally should you wish.

However, it is still important you speak to an advisor before taking the plunge. Each of us have different circumstances and there may be factors that need to be taken into consideration.

We offer the ability to start a wide range of pension arrangements such as:

• Personal Retirement Savings Account (PRSA)
• Self Employed Pensions
• Company Pension Schemes
• Executive Pension Plans

We help clients in a wide range of pension planning. If you would like to discuss your options feel free to contact our team.

You can start a pension from any age once you are over 18. Obviously the earlier you start the better. However, starting is the most important thing.

We have broken down guides for those looking to start contributing to a pension at different ages.

1. Starting a pension at 30
2. Starting a pension at 40
3. Starting a pension 50

No matter what age you start, you will have the opportunity to take advantage of the benefits pensions have to offer.

How much you will need to retire will vary drastically from person to person. Some people may be happy living a modest life while others might prefer an extravagant cruise around the Mediterranean.

As a general rule of thumb, 50% of your gross pre-retirement salary is a good starting point. 

Our survey showed that most people would like approximately €433,000 in their pension pot at retirement. This may seem like a large amount but spread over a 20-25 year period it is only €17,320 per year.

The amount you will need to retire will also depend on what age you plan on retiring. If you retire earlier and your income stops, you will likely need a larger amount to be financially secure.

We have written an in-depth blog analysing how much you need to retire at various ages. However, below is an overview:

It is worth pointing out that the above is based on assumptions. Each individual will have different needs and circumstances. Always enlist the help of a financial advisor before making any decision regarding retirement.

We have looked at the maximum pension contributions and how the limits and thresholds are put in place.

Hopefully, you now have a better understanding of what options are available. The type of pension arrangement you choose is important.

Contributing to a pension is a tax-efficient way to save for retirement. However, no two situations are the same and each should be judged on an individual basis.

Whether you are a PAYE worker, self-employed, or a company director, different options will be available. Choosing the correct option for you is what is important.

We offer a complimentary consultation as pension planning is nuanced and it is important that the fit is correct for both us and you.

If you would like to discuss your options, feel free to contact our team. 

We hope this blog has provided clarity and we look forward to hearing from you.

Pension Support Line Team