Irish Pension Information

The Ultimate Guide to

Starting A Pension
In Ireland

Starting a pension in Ireland is a great way to reduce the tax you pay on your income while also saving for your retirement. 

img-2

Where to Start When

Starting a Pension in Ireland

If you are thinking about starting a pension in Ireland then this article is full of useful information that will help you get started.

As the guide is quite detailed we have split it into different sections.  If you want to skip to a particular section the quick links below will help you to find what you are looking for.

What is a Pension?

A pension is just a savings account that you use to save for retirement. There are special rules attached to these accounts for tax and access purposes and this is what makes them different from a normal savings account.

We will look at this in more detail below but first, let’s start by taking a look at why you might want to set up a pension in the first place. 

Why Start a Pension?

img-4

The State Pension is a pension that you accumulate by paying PRSI or Pay Related Social Insurance in Ireland each time you receive your salary. If you have made enough contributions once you retire, the state then gives you a small weekly sum to live off around €36.20 per day.

 

The State Pension in Ireland is around €250.00 a week. You are probably looking forward to retirement and plan to travel, live abroad, or do the things you have always wanted to do. In retirement you will have the time to do these things, but will you be able to afford it?

 

If you think you would need more than €36.20 a day to live comfortably and pay your bills then you need to top up your income in retirement by starting a pension.

Should I Start a Pension?

You probably already knew that setting up a pension was a good idea before you got here. Since then the thought of living on just €36.20 a day in retirement has more than likely opened your eyes as to the importance of having a pension.

 

You have probably already answered the question…should I start a pension? If not there are even more reasons why starting a pension now makes sense. The earlier you start saving for your retirement the better. This is because your money has more time to grow. If you start early you need to put less money into your pension overall which translates to real savings for you. 

 

Take a look at the graph below to see how a pension fund grows over time. 

Graph to Answer the Question Should I start my pension early? Graph shows pension growth based on the age you start a pension.

It is very easy to see the benefit of starting a pension early from this graph.  Someone who starts their pension at age 20 could expect their fund to have more than quadrupled in size by the time they retire. 

 

This is why now is always the right time to start a pension, even if you can only afford to make a €25 contribution each week. The returns you will see from this contribution over time will be significant if you start early enough. 

What Type of Pension Should I Set Up?

Click the boxes to see a brief explanation of the two main types of pension in Ireland.

Employers Pensions

Defined Contribution and Defined Benefit
A pension that is set up by your employer. Normally both you and your employer make contributions to this pension however in some cases your employer may be the only one contributing.

Personal Pensions

Personal Retirement Savings Account (PRSA's)
A pension that is set up by you. Both you and your employer can contribute. This could be your only pension or you can set up a personal pension to boost your retirement income on top of an existing pension for example your employers pension scheme.

The type of pension that you choose to set up will depend on your personal circumstances. You will need to choose the pension which offers you the most value over the long term. 

The type of pension most suited to you will depend on many factors relating to your personal circumstances and the pension fund options which are open to you. We have listed the most common factors considered below but please note this is not an exhaustive list.

If you are considering starting a pension then speaking with a financial advisor will give you the best start. Your advisor will be able to help you extract as much value as possible when it comes to choosing the particular pension plan right for you.

 

If you already have a financial advisor ask them to review your options for starting a pension. There should not be a significant charge for this service. Alternatively, our Broker Partners offer this service for free with no obligation.  You can request a free Start A Pension Review below.

Get Your Options for Free?

Why are there

Tax Savings When Starting a Pension

The Government wants you to save for a pension so that you can fund your own retirement. Social welfare payments made to those in retirement such as fuel allowance and medical cards cost the government a significant amount each year. Still even with these payments on top of the state pension the Central Statistics Office found that one out of every three pensioners living alone were at risk of poverty. Link to CSO Survey 

 

This is an astonishing figure and one that could get significantly worse as the population ages. With many of us having fewer children than our parents and life expectancy increasing, there will be fewer people in the workforce to fund state pensions in the future and more people who live long into their retirement. A recipe for disaster considering the government is already finding it hard to keep pensioners above the poverty line. 

 

To encourage you to save for a pension to reduce the burden on the state the Government offers tax incentives to those who save for their pension. These tax incentives can be very lucrative indeed.

 

To understand how to extract the most value from starting a pension it is important to understand how and when these savings are made. Below is a quick overview of how income tax works in Ireland. Use the arrows to move through the slides. 

Income Tax Explained Briefly

To understand how to extract the most value from starting a pension it is important to understand how and when these savings are made. Below is a quick overview of how income tax works in Ireland. Use the arrows to move through the slides. 

Income Tax
Income tax is a tax that is applied on any income you receive. For example the payments you receive for working are income taxed.

To make the system fairer there are two rates of income tax. The standard rate and the higher rate. This means those who receive more income pay more tax.
Standard Rate
The standard rate of tax at the time of writing this guide is 20%. The standard rate cut off point is €40,000. This means that everyone is taxed at 20% on the first €40,000 they make per year.

If you make less than €40,000 per year you will not pay the higher rate of tax on any of your income.
Higher Rate
If you have an income over €40,000 per year you have reached the threshold of the standard tax rate known as the standard rate cut off point. Anything you earn over the €40,000 limit will be taxed at the higher rate.

The higher rate of tax at the time of writing this guide is 40%. Double the standard rate of income tax.
Previous slide
Next slide
Income Tax
Income tax is a tax that is applied on any income you receive. For example the payments you receive for working are income taxed.

To make the system fairer there are two rates of income tax. The standard rate and the higher rate. This means those who receive more income pay more tax.
Standard Rate
The standard rate of tax at the time of writing this guide is 20%. The standard rate cut off point is €40,000. This means that everyone is taxed at 20% on the first €40,000 they make per year.

If you make less than €40,000 per year you will not pay the higher rate of tax on any of your income.
Higher Rate
If you have an income over €40,000 per year you have reached the threshold of the standard tax rate known as the standard rate cut off point. Anything you earn over the €40,000 limit will be taxed at the higher rate.

The higher rate of tax at the time of writing this guide is 40%. Double the standard rate of income tax.
Previous slide
Next slide

Reduce Your Tax Bill When Saving into Your Pension

It goes without saying that no one enjoys paying tax on their hard earned income. So if there was a way you could avoid paying tax and legally keep this money then it would be worth taking a look at right?

 

There is a way to legally reduce your tax bill and you’ve guessed it…its by saving into your pension. The government has said that you will not be taxed on any funds you put into your pension subject to certain limits. This is known as pension tax relief. 

 

So how does this work? Lets take a look at the examples below. Click on the boxes for more information. You will see the savings double for those earning over €40,000 per year.

John's Tax Bill

Earns €35,000 per year.
As John earns €35,000 per year, he will be charged the standard rate of tax 20% on all the income he receives. This means John's income tax bill will be €7,000.

Any money John puts into his pension will not be subject to income tax. So if John put €5,000 into his pension. He would not pay any income tax on this €5,000. He would save the 20% tax he would have paid which would be €1,000 in this case.

Mary's Tax Bill

Earns €50,000 per year.
The first €40,000 is taxed at 20%. Mary earns €50,000 in total which is €10,000 over the standard rate limit. Mary then pays the higher rate of 40% of tax on the €10,000 she earns over the cut off point.

Mary will pay €4,000 in income tax on this €10,000 alone giving away nearly half of this income. If Mary put this €10,000 into a pension she would not pay any tax on the €10,000 saving the €4,000 she would have paid in tax had she not put it into her pension.

John's Tax Bill

Earns €35,000 per year.
As John earns €35,000 per year, he will be charged the standard rate of tax 20% on all the income he receives. This means John's income tax bill will be €7,000.

Any money John puts into his pension will not be subject to income tax. So if John put €5,000 into his pension. He would not pay any income tax on this €5,000. He would save the 20% tax he would have paid which would be €1,000 in this case.

Mary's Tax Bill

Earns €50,000 per year.
The first €40,000 is taxed at 20%. Mary earns €50,000 in total which is €10,000 over the standard rate limit. Mary then pays the higher rate of 40% of tax on the €10,000 she earns over the cut off point.

Mary will pay €4,000 in income tax on this €10,000 alone giving away nearly half of this income. If Mary put this €10,000 into a pension she would not pay any tax on the €10,000 saving the €4,000 she would have paid in tax had she not put it into her pension.

Tax Relief on Pension Contributions Ireland

There are limits to the amount of tax relief on pension contributions you can claim in Ireland. The first is an age related limit. The second is an overall limit. Let’s look at these in more detail below.

 

Age Related Contribution Limits

This rule if you haven’t already guessed is determined by how old you are. The older you are the higher the percentage of your income you can put into your pension without paying tax. The table below shows these limits.

A Table which shows the Pension Tax Relief Limits in Ireland.

Total Earnings Limit

The second limit is a total earnings limit. At the time of writing this guide the limit is €115,000. This means you can only get tax relief on the percentage (based on your age) of €115,000 or under.

 

If you earn over €115,000 to calculate the amount you can put into your pension and receive tax relief you would use the percentage allowed from the table above of €115,000 only.  

Pension Contribution Calculator

The pension contribution calculator gives you an indication of the tax free contributions you can make into your pension.

Simply enter your salary before tax and your age. The Pension Contribution Calculator will give you an instant result.

 

img-7
Pension Contribution Calculator

Pension Contribution Calculator

€115,000 is the maximum amount allowed for tax relief.

Reset

Get Your Options for Free?

How To

Start a Pension

Now you the importance of having a pension and the savings that you can make on your tax bill by setting one up you are probably wondering how you can get started.

 

The next section includes more information on how to set up your pension. You will also have the option to request a free start your pension review from one of our broker partners.

img-8

How do I Start a Pension?

If you are ready to start a pension the first step is to get your pensions options prepared by a financial advisor. Your pension is a long term savings plan and having the right advice is crucial to choosing the pension most suited to you. 

It’s much easier than you think to get started. Take a look at how the process works step by step.

Step 1

Talk to an Advisor
You will normally have a brief chat over the phone where your financial advisor will ask you some questions in relation to your current circumstances.

Step 2

Get Your Options
Your advisor will come back to you with a recommendation on the particular type of pension plan that will offer you the most value.

You can then review the options and see if any are suitable.

Step 3

Start Your Pension
Your advisor will prepare the paperwork needed and send it to you to sign. In most cases this can be done online. Once your advisor has your completed paperwork they will set up your pension and you can start making contributions.

I Don't Have Much to Put into my Pension

Many people avoid setting up a pension because they are not sure how much it will cost. This is a common pitfall… and it results in people facing a retirement below the poverty line. Not a future any of us would wish for.

You might be surprised to find out that you can get started with as little as €25.00 per week.  After tax relief the real cost (reduction in your take home pay) might only be €15.00. 

To see how a little each week can go a long way overtime take a look at the example below.

Is it too Late to Start a Pension?

No, it is never too late to start a pension. Some people reach their 40’s, 50’s, and even their 60’s without putting a pension plan in place. The realisation that retirement is only around the corner and the stark reality that you don’t have any funds can cause you significant stress and worry.  

If this is you, you’re not the only one. You need to speak to a financial advisor straight away and get a plan in place for building up some funds for your retirement. 

It is never too late to make a good decision as they say. Burying your head in the sand (we have all done this at one point or another) will only make things worse by giving you even less time to build up your pension.

Our Broker Partners are very aware that many people reaching retirement age now were struck hard during the recession of 2008 and that this has continued to impact them financially. They will work with you to put a manageable pension plan in place. 

You will find once you know where you are going with your pension and how you are going to get there (Your Plan) this burden will lighten. 

Free No-Obligation

Start Your Pension Review

If you are ready to take charge of your pension and protect yourself financially in retirement then a free no obligation Start Your Pension Review will help 

Start a Pension Assessment
0% Complete
1 of 5

Your Current Employment

At the moment I am...