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How valuable are the tax breaks on pensions?

Posted in Announcement, News, Pension, Savings, Tax on Oct 18, 2019

We’re all aware of the need to plan for later in life when we retire and our income stops. For some fortunate people, their employer has a pension scheme in place. Others are not so lucky and have to look after their retirement planning themselves.

However not everyone is aware how tax efficient pensions are. After all, it’s in the government’s interest to find some way to encourage us all to plan for our retirement, because the more people save themselves for their later years, the less of a burden they are likely to be on the state. The tax breaks on pensions are actually really valuable as a result. Consider the following tax advantages.

You get full tax relief at your marginal rate on contributions

Consider if you save money in the bank. You decide to pay in €100 every month. That’s what it costs you. However if you save this money in a pension, you get tax relief on this amount. So if you are a 20% tax payer, you’ll get a tax refund / reduction of €20 for every €100 you pay. If you’re paying income tax at the higher rate (40%), the actual cost to you of every €100 that you pay into a pension is €60 (€100 - €40). This will help you build up a decent investment much quicker.

There are limits though on the amount you can pay for tax relief purposes. We would be happy to go through the detail of these limits and help you identify the right amount of pension contributions for you.

Your fund grows free of tax (no DIRT, CGT etc.)

Did you know that when you earn interest in savings from a bank, the government dips in and takes out 35% of the interest that you earned in DIRT tax? Other investments that you have might avoid DIRT tax, but are then usually subject to Capital Gains Tax, which is currently applied at a rate of 33% of your profit.

The good news for pension funds is that neither of these taxes apply! Your fund grows free of tax, helping you to build up a decent war chest to see you through your retirement years.

And then you can take a portion of your fund tax-free at retirement

Then when you actually get to retirement, you can take a portion of your fund out tax free as a lump sum. This is usually 25% of the fund but it can vary across different types of pension schemes. Again your Financial Broker will help you plan for the most tax efficient situation available to you.

The balance of your fund is then taxable. However you still get your tax credits, which will reduce any tax you will pay. In fact, there are tax exemptions in place for the over 65’s, up to certain limits.

The tax breaks on pensions are really valuable. Avail of them while you can!

For more information on how to maximise your pension contributions to minimise your tax bills, get in touch today. At Gallivan Financial, our dedicated team of financial advisors are committed to offering you expert impartial advice on a whole host of topics. Simply call us on 064 6637393, email [email protected] or drop by our office today. We’ll be delighted to help.

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