Conor Carey • 01 Nov 2018
Thinking about your Pension? – Think tax relief!
Pension Plans are in a league of their own when it comes to tax-efficient investments – but that might not last forever. To maximise the tax benefits available, you might like to act now. As the push for auto-enrolment grows, so too do fears about marginal tax relief on contributions to your pension plan. Higher earners should take advantages of the current tax-relief structures while they are in place as tax relief may be eroded for personal contributions.
It’s important to understand how tax relief operates, the restrictions involved and how to maximise the relief’s available. The actual level of tax relief on pension contributions is restricted to certain limits and where you do not contribute the maximum amount for tax purposes on an annual basis, the balance does not roll over when you are in a healthier financial position – it’s a use it or lose it system!
On a day to day basis we all face the challenge of competing demands for our income at different times in our career and as a result it is not always possible to maximise the tax relief available each year. The maximum annual pension contribution allowable for tax relief purposes is calculated as a percentage of earnings, with the percentage set by reference to your age. The maximum earnings allowable against this percentage is €115,000 for all individuals.
Tax relief is granted at your marginal rate so for maximum tax efficiency you should contribute up to the point of receiving higher rate relief on all pension contributions, currently 40%. Tax relief plays a significant role in affording people the chance to fund their pension plans and understanding how to maximise this relief is important when reviewing your plan.
Self-employed people have additional considerations in relation to funding their pension plans. The competing financial demands of funding a business are likely to mean that the self-employed individual will start to make pension provision or at least meaningful pension provision at a much later stage in their working life.
Opportunities to avail of full tax relief on any investment are few and far between and contributing to a pension plan is one of those few chances in life to avail of full income tax relief. Our experience at CMCC Financial Solutions tells us that most self-employed people address this situation at the end of each year but a lot of employees don’t ever think about it. Employees who are contributing a regular contribution of say 5% or 8% salary can also make an additional voluntary contributions each year where the tax savings at source are significant.
With potential changes coming down the line through auto-enrolment the general feeling is that the current tax relief structure will undoubtedly also change. This may be a top up contribution by the government, say for every €3 an individual makes they will top up by €1, or we may see the standardisation of tax relief for all at say 25%. It’s important not to be blinded by tax relief as your pension needs to be all about your retirement, having a plan and reviewing it regularly. As changes on how pension plans will be structured appear to be on the way it’s also important to use the current tax-reliefs while they are still available.
1st November 2018