How does tax relief on pensions work?

The government really wants you to save for your retirement.  So they offer three great tax advantages to encourage you to save into your pension.

Here’s Moneycube’s explainer on the three tax concessions for pension savers.  Read how tax relief on pensions in Ireland works, how much you can claim, and how that will accelerate your pension savings.

We’ve also covered what the numbers look like if you choose to max your pension allowance, how your money can grow once you’ve paid it into a pension, and the tax benefits at retirement.

What’s a pension?  Read about how pensions work

Interested in starting a pension?  Start here

1. Tax relief on contributions

Firstly, you get income tax relief on the money you put in.  If you’re a 40% rate taxpayer, for every €60 of after-tax pay you put in, the taxman adds €40.  (That’s the €40 you’d normally be paying in tax on €100 of earnings).

That’s a guaranteed growth rate of 67% – an investment return that cannot be beaten elsewhere.

If your top rate of tax is 20%, then for every €80 of after-tax pay you put in, the taxman adds €20.

The taxman imposes two limits on the relief you can claim.

Firstly, depending on your age, you can claim tax relief on different percentages of your income to a pension (it gets more generous as you grow older).

Secondly, the maximum amount of your pay that is taken into account for calculating tax relief is €115,000 per year.

So the limits on the tax relief you can claim are as follows:

There are some big numbers here, but what does it mean for you in practical terms?  The table below shows how tax relief reduces the cost to you, and shows what it would look like if you maxed your pension contribution on a monthly basis.

Remember this is a max position, assuming you earned €115,000 or over.  For many people, the amount will of course be lower – that is, your income multiplied by the percentage that applies to your age in the table above.

You can claim tax relief for contributions on your income right up until the income tax deadline, in October/ November the following year.  For example, for income earned in 2020, you’ll be able make a claim tax relief on contributions as late as October 2021.

Interested in starting a pension?  Start here

2. Your cash grows tax-free

Secondly, once in a pension, investment growth on the money in your pension pot accumulates tax-free.

There’s no income tax, capital gains tax, deposit interest retention tax or capital gains tax on your money while it works away on your behalf.  That’s a lot of tax to avoid!

3. Tax-free lump sum at retirement

Lastly, most people can take a lump sum of up to 25% of their pension pot when they retire.

Pension pots are capped overall at €2 million in Ireland.  So your maximum lump sum can be as much as €500,000.

What’s more, the first €200,000 of your lump sum is paid tax-free.  It’s probably the only time in your life you’ll collect anything close to that amount without the taxman having a piece.

The remaining amount of your lump sum is taxed at the standard rate of tax, 20%. For higher-rate income tax payers, this represents a major saving.

The remainder of your pension fund can be paid to you in retirement, and taxed at the usual income tax rates.

Interested in starting a pension?  Just fill in this form and we’ll be happy to help.

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