Pensions
A pension is a fund into which amounts are paid regularly during an individual's working career, and from which periodic payments are made to support the person's retirement from work.
There are a few different types of pensions, and we simplify these into a PRSA and Directors Pension below. There are many advantages of having a pension and we recommend anyone with a steady income to consider setting up a pension or joining their companies pension scheme.
What is the main advantage of a Pension?
-Tax relief & tax free growth-
Pensions are a very tax efficient way of saving for retirement. Payments you make to your pension can qualify for generous tax relief so that they will cost you less than you think.
When you contribute to a pension fund, whether privately or through your employer, your contribution is deducted from your gross income before it is taxed. So, you effectively save at your higher rate of tax and are able to deposit that full amount into your pension fund.
Both employer and private contributors are eligible for relief, and the relief will be at either the standard rate (20%) or the higher rate (up to 40%), depending on their total income and tax status. However, unlike employer-sponsored pension schemes, where the employer often deducts contributions from the salary and provides tax relief directly, individuals making private contributions need to claim the relief through their annual tax return.
For example, for every €100 you contribute, your take-home pay will only be reduced by €60 if you pay tax at 40% and by €80 if you pay tax at 20%. €100 is invested into your pension plan.
This means that should you contribute €300 a month, your take-home pay will only go down by €180 if you pay tax at 40% and by €240 if you pay tax at 20%. But €300 will be invested into your pension plan
PRSA Pension
(Personal retirement savings account)
A PRSA pension is a personally owned pension, held in your own name which is a long term investment designed to help you save money for your retirement. Employers can contribute to a PRSA plan if they wish to help increase your fund. If you move jobs or employment status you can transfer you PRSA fund to your new employer or to an individual PRSA and continue contributing. There are no exit penalties.
Features:
- Tax benefits - reduce tax on business profits by contributing excess profits to your PRSA. You can reduce your PAYE tax due by making regular or singular contributions to the PRSA
- Choice - Most pension plans have a wide range of investment options, designed to meet your needs
- Flexibility - you can increase your contributions, or make a one off contribution at any stage. A PRSA builds up a fund which is available to you at retirement, at any stage between age 60-75
- Retirement - On retirement you can take a tax-free lump sum of 25% of your fund, up to a maximum of €200,000. You can also transfer some or all of your retirement fund into an annuity or other approved scheme which will give you a regular pension income
Directors Pension
A Director/Executive Pension is a product designed to allow Company Directors and key employees to save for retirement while taking advantage of useful tax incentives, such as extracting wealth (cash) from the company in the most tax-efficient manner. This pension is set up on a defined contribution basis which means that the benefits on retirement depend on the size of the your fund.
Features:
- A Directors Pension can provide you with a product that will help reduce your corporation tax bill while also turning company funds into personal wealth.
- The company contributions are deductible against trading profits in the accounting period during which the contribution is made.
- Contributions made by your company to your Directors/Executive pension are not treated as a benefit in kind.
- There is no income tax, PRSI or USC liability for the director or employee as a result of contributions from company funds.
- Your company can make contributions to your Directors/Executive pension for years you have missed.
- Funds grow tax free within a Directors/Executive pension.
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