Fast guide to pensions
In Ireland almost 1.3 million people do have not any private pension provision. Accepted for some additional pension funding may not be affordable, however, for others it is frequently the case that there is a need for some basic knowledge.
Here are some frequently asked questions that may help you kick start your pension journey.
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Question 1; how much can a pension reduce my tax bill by if i am self-employed ?
Answer; the good news is before October 31 this year you can reduce your 2020 Final Tax liability and your 2021 Preliminary Tax liability by making an investment into a Personal Pension or PRSA. Pension contributions are subject to the age-related limits.
Example, if Mary is aged 45 and makes EUR 10,000 investment into her pension, the tax relief achieved is EUR 4,000. Actual tax bill for 2020 may be reduced by EUR 4,000 and also Preliminary Tax for 2021 is reduced.
Tip for discussion - if you are self employed you may be able to claim tax relief on life insurance up to 40% (RESTICTIONS and LIMITS apply) and also claim tax relief on income protection insurance up to 40% (RESTRICTIONS and LIMITS apply).
Question 2; what are the age related limits?
Age band % of net relevant earnings
up to age 29 15%
30 - 39 20%
40 — 49 25%
50 - 54 30%
55 - 59 35%
60 and over 40%
Notes: 1. An earnings cap of EUR 115,000 applies to contributions. Pension contributions made by you in 2020 must be deducted from the maximum tax-allowable contribution calculated based on these limits. 2. Age is age on your birthday in 2020. 3. Retirement benefits are subject to separate Revenue LIMITS.
Question 3 ; if i am an employee in a company and the company has a pension scheme, what are AVCs?
Additional Voluntary Contributions AVCs are contributions you make to a pension plan above the employee normal contribution rates. If you pay tax at your marginal rate of 40% then you will receive tax relief at 40% on these investments. These investments can be made to the existing scheme (normally lower charges apply) or to an AVC PRSA where annual management fee will be 1% per annum or greater. AVC PRSAs may allow you to invest execution only into direct shares or with other investment managers not available on the company pension plan.
Tax relief on AVCs is provided at source if made through payroll. Alternatively, your Accountant / Tax Advisor will ensure your relief is claimed when filing your tax return. You can also do it your self via MyAccount.ie
Question 4; do i have to pay Tax on the growth of my pension plan ?
Good news is that pension funds grow tax-free. However, at retirement income tax may be payable on a portion of the income and/or withdrawals taken from your pension. The rate of tax is dependent upon your overall income, age and how much withdrawals you take. There are ways to optimise the tax and good planning in advance is sound advice.
Question 4; how much of my pension fund can i access at retirement tax free ?
If you have a PRSA or Personal Pension you can access 25% of the fund tax free. A similar option is available to members of Defined Contribution Company Pension Plans. However, they also have the option of choosing a ‘salary and service’ tax free lump sum (RESTRICTIONS and LIMITS apply to residual funds). So, good to check both options and determine what’s best for you.
Question 5; what is the maximum pension fund tax free lump sum ?
The lifetime limit is currently EUR 200,000 tax free from all pension sources.
If your pension fund is EUR 1.2 million, then you may be eligible to take 25% of the fund as a taxable lump sum. the first EUR 200,000 is tax free and the remaining EUR 100,000 is taxed at 20%. So you tax in hand would be EUR 200,000 plus EUR 80,000 = EUR 280,000
Question 6; what happens to the other 75% of my fund after taking tax free/taxable lump sum ?
The balance of your pension fund can be used ;
to invest into an Approved Retirement Fund ARF and/or Approved Minimum Retirement Fund AMRF (LIMITS and RESTICTIONS apply) or
be used to buy a guaranteed income for your life time (with spouses guarantee)
combination of the above.
Question 7; where do i investment my pension money and what is the risk that it will be lost ?
Equities, bonds, property, money markets, alternatives and cash / deposit instruments … investing often comes with a bewildering array of choices.
History has shown that the longer you keep your money invested, the greater the chances of a positive outcome. Staying fully invested through a market cycle has, in the past, ensured investors reap greater rewards over the long-term as rebounds after large losses are often significant.
Stay invested - By missing just the best 10 days in the market from 2003 to 2017, your investment returns would have been 48% lower*.
Volatility in markets is healthy - Markets rise and fall daily, weekly, monthly – it is part of the natural cycle of investing. Since 1980, European equities have finished the year in positive territory on 31 of 40 years, yet in each of those years, the market suffered an average intra-year decline of 15.2%*.
Keeping your money in cash is NOT the longer term answer - Markets are still in a period of significant volatility and further market falls are still possible. In any ten year period the odds of equities posting positive returns is 96%*.
Diversify your pension monies - While there is no such thing as a 100% risk-free investment, diversification can mitigate the inherent risk of investing, helping you to reach your long-term financial goals. Multi-asset risk adjusted funds are available to help your invest into a fund which suits your risk tolerance and capacity to loss.
All investments involve risk. The funds used to maximise your returns offer no guarantee against loss or that the fund objective will be attained. This is NOT a guaranteed capital or capital protected investment. There are RISKS to your capital should you choose to invest into these funds.
* Source Zurich Life and Moneymate Sept 2020 .
Want to know more? We are available to discuss your options, and we look forward to hearing from you.
Our job is to help you choose a product and structure that will help you meet your goals.
telephone | 091441188 and/or email | office@nelsonlife.ie
RETIREMENT & PENSIONS | INVESTMENTS | FINANCIAL PLANNING | LIFE INSURANCE
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WARNING: Past performance is not a reliable guide to future performance. WARNING: The value of your investment may go down as well as up. WARNING: You may lose some or all of the money you invest. WARNING: These funds may be affected by changes in currency exchange rates. WARNING: If you invest into this product you will have access until you retire (Pension Products). WARNING: The above content does not constitute investment advice, as it does not take into account the investment objectives, knowledge and experience of financial situation of any particular person. Prospective investors are advised to make their own assessment of the information contained herein and to obtain professional advice suitable to their own individual circumstances. WARNING: The information contained in this document is based on our understanding of current tax legislation and the current Revenue Commissioners interpretation thereof and is subject to change including retrospectively without notice. This is intended as a general guide only and is not a substitute for professional tax, legal and investment advice.