Self-Employed
If you’re self-employed, it’s important that you plan for your retirement, especially as you don’t have an employer pension arrangement.
There are two main types of pensions suitable for the self-employed – Personal Pensions and PRSA’s. Our financial planners can advise which is the best option for you.
Tax Advantages
- Pension Contributions are subject to income tax relief at your marginal rate of income tax*.
- All investment growth achieved is applied tax-free (no DIRT or Exit Tax)
- At retirement, you’re entitled to a tax-free lump sum worth 25% of the fund value (subject to a lifetime limit of €200,000).
*within Revenue limits.
Contributions
- You can make regular monthly contributions and/or lump sum payments.
- Based on your age and earnings, our financial advisors can work out how much you can pay into your pension to get the maximum tax-relief available.
- Many self-employed people like to use their pension contribution to reduce their tax liability ahead of the self-assessment deadline. As there is income tax relief available on pension contributions, this can be offset against your tax bill.
Example
Tax Due
Mr A, aged 45, with earnings for 2019 of €80,000.
He has a tax liability of €9,000 due on 31st October in respect of 2019.
He has already paid €16,000 for 2019 in the previous year so his total tax bill for 2019 is €25,000.
Preliminary tax for 2020 is 100% of 2019’s total tax bill.
Therefore his 2020 preliminary tax bill is €25,000.
The total amount due to Revenue on 31st October 2020 is €34,000.
(€9,000 + €25,000).
Pension
In order to reduce this payment to Revenue, Mr A makes a pension contribution of €20,000.
As he pays income tax at the marginal rate of 40%, 40% income tax relief is available on this pension payment. This is worth €8,000 in tax relief.
He backdates the tax relief to 2019.
Reduced Tax Bill
This means that Mr A’s total tax bill for 2019 is reduced:
€25,000 less €8,000 tax relief = €17,000.
However, as he already paid €16,000 in 2019, this means he now only owes €1,000 for 2019.
Preliminary tax for 2020 is 100% of 2019’s total tax bill.
Therefore his 2020 Preliminary Tax Bill has also been reduced to €17,000.
Overall, Mr A was due to pay €34,000 to Revenue.
Instead, he has to pay €18,000 now (€1,000 (for 2019) + €17,000 (for 2020)) plus he has an additional €20,000 in his pension pot.
Investment
At Gallagher Insurance, we have access to Ireland’s leading pension providers. This means that we are not tied to one particular company, giving you a greater level of choice when it comes to investing your money.
Our experienced financial advisors will be able to determine your attitude to investment risk (low risk, high risk or somewhere in between). Taking account your circumstances, our financial planners will happily recommend some suitable funds for you and will periodically review the progress of your pension plan.
Employees
Whether you are a member of your employers pension scheme, have recently left a job with a pension, or don’t have any arrangement in place, our team of expert pension advisors can help.
A: I have a pension scheme in work
Our advisors are always happy to review any existing arrangements you might have in place. A financial review can help in making sure you’re contributing enough for a comfortable lifestyle in retirement, that you’re invested in suitable funds and that your plan has competitive charges.
Additional Voluntary Contributions
Revenue has set out maximum pension contribution limits for tax relief purposes, based on your age and earnings. If you are contributing to a scheme but are not maximizing your threshold, it’s possible to make an AVC (Additional Voluntary Contribution) to ensure you’re taking full advantage of the available tax relief.
Before 31st October each year, you can make a lump sum contribution and backdate this to the previous year. Assuming your tax affairs are in order, you are then entitled to a tax refund from Revenue.
Our financial advisors are available to set this up with the best pension provider for your unique situation, hassle-free. We’re here to offer guidance when it comes to choosing investment funds and to periodically review your pension to make sure you reach your financial goal.
Example
Current Situation
Mr A, aged 45, with earnings for 2019 of €50,000.
Last year, Mr A earned a gross amount of €50,000.
He is a PAYE employee and so his income tax was deducted from his salary every month.
Mr A paid €200 per month to his Company Pension in 2019.
Based on Mr A’s age and earnings, in 2019 the maximum he could have contributed to his pension was €12,500.
This means that he has an unused allowance of €10,100, for 2019.
Backdated Pension
Mr A decides to make a lump sum contribution of €7,500 as an AVC.
As he pays income tax at 40%, he can then claim income tax relief of 40% on this contribution.
This amounts to €3,000.
Mr A decides to backdate this pension contribution to 2019.
Pension Top Up & Tax Back
€7,500 is invested in his pension.
Within about 2 weeks, Mr A receives €3,000 from Revenue so the net cost of this pension contribution is only €4,500.
B: I Don’t Have a Pension in Work
Some employees don’t have a pension scheme through their employment so it’s important that they consider contributing to a personal pension plan to fund their retirement.
A Personal Pension or a PRSA would be suitable options and our Pensions team at Gallagher Insurance we will be able to recommend the best pension plan for you.
Tax Advantages
- Pension Contributions are subject to income tax relief at your marginal rate of income tax*.
- All investment growth achieved is applied tax-free (no DIRT or Exit Tax)
- At retirement, you’re entitled to a tax-free lump sum worth 25% of the fund value (subject to a lifetime limit of €200,000).
*within Revenue limits.
Contributions
You can make regular monthly contributions and/or lump sum payments.
Based on your age and earnings, our financial advisors can work out how much you can pay into your pension to get the maximum tax-relief available.
Before 31st October each year, you can make a lump sum contribution and backdate this to the previous year. Assuming your tax affairs are in order, you are then entitled to a tax refund from Revenue.
Example
Mr A, aged 45, with earnings for 2019 of €50,000.
Current Situation
Last year, Mr A earned a gross amount of €50,000.
He is a PAYE employee and so his income tax was deducted from his salary every month.
Mr A paid €200 per month to his Personal Pension in 2019.
Based on Mr A’s age and earnings, in 2019 the maximum he could have contributed to his pension was €12,500.
This means that he has an unused allowance of €10,100, for 2019.
Backdated Pension
Mr A decides to make a lump sum contribution of €7,500 to his personal pension.
As he pays income tax at 40%, he can then claim income tax relief of 40% on this contribution.
This amounts to €3,000.
Mr A decides to backdate this pension contribution to 2019.
Pension Top Up & Tax Back
€7,500 is invested in his pension.
Within about 2 weeks, Mr A receives €3,000 from Revenue so the net cost of this pension contribution is only €4,500.
C: I’ve Left a Job that Had a Pension
If you’ve recently left or changed employment but haven’t reached your retirement age, there are a number of options available to you in relation to your old employer’s pension scheme.
Our friendly financial advisors are here to go through your options and recommend the most suitable option for you, based on your unique circumstances. Such options include:
- Move to a Personal Retirement Bond (a pension plan in your own name)
- Move to a PRSA (a pension plan in your own name)
- Move to your New employers’ pension scheme
- Leave as a deferred benefit within the former scheme
- We’ll handle the paperwork for you and contact your former employer or scheme trustees if need be, making the whole process hassle-free for you.
Company Directors
Executive Pensions can be set up for company directors and/or employees of a limited company.
You can divert gross company funds into a personal retirement pot. This is the most tax-efficient way for company directors to access gross company profits.
Contributions
- All contributions can be made by the company which are tax-deductible expenses.
- There is no tax or Benefit-in-Kind implications for you.
- You can make regular monthly contributions and/or lump sum payments.
- Contributions can be covered by an Income Protection policy.
How much?
Revenue has set out maximum contribution levels that vary depending on your age, marital status, length of time with the company, existing pension arrangements etc. Our expert financial advisors can work out how much you can and should be paying into your pension.
Tax Advantages
- Contributions are tax-deductible expenses (i.e. corporation tax relief at 12.5% applies)
- All pensions are exempt from tax on any investment growth achieved.
- A tax-free lump sum of at least 25% of the total pension pot is available at retirement
Why? – Unique Advantage
As a company director, you have greater scope for pension funding compared to PAYE employees and the self-employed based on Revenue rules.
This is the most tax-efficient way of transferring company profits to personal wealth and may be especially useful for someone about to retire or sell their company.
The contributory state pension is €12,911.60 per year so it is important that you have a private pension to supplement this income.
Example
Mr A, aged 35, with earnings of €50,000.
He is a company director and the company pays €200 per month to his Executive Pension.
Based on Revenue calculations, the maximum that Mr A’s company could have contributed for him is €2,000 per month. They would also allow a once-off lump sum called a Special Contribution of €70,000.
Mr A has a good bit of money tied up in the company. Therefore, before his year end, he decides to make a company contribution of €50,000 to his pension. This is allowable as it’s within the Revenue range.
In effect, he has now moved €50,000 that was tied up in the company, to his personal retirement pot with zero tax implications.
At Retirement
Most pension plans allow access to the retirement benefits from age 60.
Tax Free Lump Sum
25% of the fund can be taken as a tax-free lump sum (subject to a lifetime limit of €200,000).
Please be advised that company pension plans and Personal Retirement Bonds may allow for a higher tax free lump sum under the Salary and Service route.
If you are proceeding with the Salary and Service route then the balance of your pension fund must be taken as an annuity. This is a fixed pension income that’s paid to you for the rest of your life.
If you are not retiring under the Salary and Service route then the following options are open to you:
Balance of Fund After Tax-Free Lump Sum
Next €63,500
A) Unless you have a guaranteed pension income of at least €12,700 per year, or are aged over 75, you must invest the next €63,500 of your pension in either an Approved minimum Retirement Fund or an Annuity.
Approved Minimum Retirement Fund (AMRF). This is a pension policy where the funds are invested. From this you can only take one withdrawal of 4% of the fund value, once per year. Once you begin receiving a pension income of €12,700 p/a or reach age 75 then this policy converts to an Approved Retirement Fund (ARF). From this you must take a withdrawal of 4% if you’re aged over 60 and 5% if you’re aged over 70. You can also take lump sums or fully encash the policy.
AND/OR
B) An annuity is a fixed pension income paid to you until you die.
If you have an pension income of €12,700 per year, are aged over 75 or have previously invested €63,500 in an AMRF or Annuity then the following options are available to you:
a) An Approved Retirement Fund (ARF) is an pension policy where your money is invested. From this you must take a withdrawal of 4% if you’re aged over 60 and 5% if you’re aged over 70. You can also take lump sums or fully encash the policy.
b) Invest in an annuity
c) Take the balance as a taxable lump sum.
Trivial Option
There is also the option called the Trivial Option. If the balance of all your pensions, after your tax-free lump sum is less than €30,000 then you can take the balance of the fund as a lump sum, subject to income tax legislation.
Alternatively, if the total benefits, before your tax-free lump sum can only secure an annuity of less than €330 per year then the balance of the fund can be taken as a lump sum, subject to tax at 10%.
Please note that all income received from pensions are subject to income tax legislation.
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