When it comes to a private pension, the tax benefits on offer in Ireland are extra generous. But not enough people fully understand how they work. Following are some common misunderstandings and ways to avoid them:
Misunderstand of tax-free benefits
Many people struggle to understand the enormous tax benefits of saving into a pension. Ireland is unique, where the tax benefits are enormous. Not only is any income that is put into a pension deducted from gross income for tax purposes, the growth of pension fund value is also free from tax. This compares favourably to non-pension investments where tax can be as high as 41%.
Miscalculate age-related limits
For employees, they often fail to understand their maximum contribution allowances. Under Irish tax rules, someone in their twenties can contribute 15% of gross salary whereas someone in their 60s can contribute up to 40%. But where an employer contributes a specific percentage, this does not count against the individual allowance limit. Many people miss out on additional contributions as a result.
Misjudge tax on retirement
At retirement, many people ask if they will be taxed heavily on drawdown, when it’s a defined contribution pension. An employee can draw down 25% of the fund value tax-free and the remaining funds can be put into an Approved Retirement Fund (ARF) where it is still protected from tax (other than imputed withdrawal
rules).
Mistake backdating
Current tax rules allows for a once-off pension top up annually. Many people are either unaware of this option or wrongly assume it is a lifetime once-off contribution, but it is once-off every year.
Saving for income in retirement makes for good financial planning. Doing so will reduce the risk of financial stress during a period of significant financial adjustment.
Frank Conway is a Qualified Financial Adviser and founder of MoneyWhizz.
Comments are closed.