Key Post 41% tax payers should make the maximum pension contribution in 2010 and 2011

Brendan Burgess

Founder
Messages
38,526
This post is aimed at self-employed, but the same principle applies to those on PAYE.


Tax relief is still available at 41% on pension contributions for 2011 and they can be backdated to 2010. Maximum advantage should be taken of this in 2011, as the 4 year plan proposes to reduces tax-relief to 20% between 2012 and 2014.
Tax relief is still available at your marginal rate e.g. 41% or 20% or 0%
You don’t get relief from PRSI or the USC in respect of 2011 payments.
You will get it in respect of pension contributions made in 2011 in respect of 2010 tax year.

The tax treatment of pensions may well change over the coming years. Likewise, marginal tax rates may rise or fall. This post is based on the current treatment and changes planned in the 4 year plan. The new government may have other changes in mind.

The fund will accumulate tax-free
As of now, there are no taxes on investment income received within the pension fund. This may change.

Tax rate on income from a pension fund in retirement (i.e. annuity or ARF drawdown)
marginal tax rate on retirement income |41% |20% | 0%
USC | 4%|4%|4%
PRSI|4% |4%|4%
Total|49%|28%|8%
@ 75%|37%|21%|6%
Explanation: On retirement, you will get 25% of your fund tax free. The remaining 75% will be taxed at 49% if you will then be on the 41% tax rate. This means that the net tax rate will be 37%.

Note: I am assuming that PRSI or its equivalent will be payable on income in retirement in future years.

If you are a 41% tax payer this year, you will get relief at 41% and the maximum tax rate on your retirement income will be 37%. It may be as low as 6% - so it's still great value.

If you are a 20% tax payer, you should only contribute to a pension fund, if you are very certain that your marginal rate of tax on income will be 0%.
So if you are approaching retirement and if you will have no other income on retirement, then consider contributing to a pension fund.

If you have many years to go to retirement, your income on retirement may well be taxed at 41%, so don’t contribute to a pension. If your income rises over the coming years, you may start paying 41% tax and you would get better value for your pension contributions then.

Predicting your tax rate on retirement
A single person can earn up to €32,000 at the 20% tax rate. If your pension is your only source of income at that stage, a pension fund of €600,000 at 5% drawdown would pay €30,000 a year. If you have rental income or dividend income or a pension from some other source, then you would need a much smaller pension fund on retirement to bring you into the 41% tax bracket.

Factors to consider when deciding to contribute to a pension
You need the cash flow
Lack of accessibility



Summary of rules for 2011

Maximum allowable pension fund: €2.3 million ( exemptions for those with existing funds in excess of this)

Earnings limit : €115,000 ( this also applies to payments made in 2011 and backdated against the 2010 tax.)

Maximum contribution as a percentage of salary
Up to 29| 15%
30 – 39|20%
40 - 49|25%
50 – 54|30%
55 - 59|35|%
60 +| 40%
Acknowledgement: Thanks to Liam Ferguson for his comments on an earlier draft
 

Goggles

Registered User
Messages
37
You don’t get relief from PRSI or the USC.
Hi Brendan, excellent post, thank you.

I did receive confirmation from the Revenue via email that PRSI relief will be given in respect of private pension payments made before 31st October 2011 once the tax relief has been granted in respect of the tax year 2010

G*
 

Goggles

Registered User
Messages
37
Hi Brendan

Yes that's exactly what I meant - all the more reason to maximise contributions in respect of 2010 if possible!
 

Brendan Burgess

Founder
Messages
38,526
Hi Tommy

I do cover it here, but maybe I need to give it more prominence?

Factors to consider when deciding to contribute to a pension
You need the cash flow
Lack of accessibility
The tax treatment may change adversely

Do you agree with the general thrust of the post?

Meg.
 

cormacol

Frequent Poster
Messages
109
You might want to caveat all this in relation to the reduced max lifetime limit and Fine Gael's plans to reduce it further.
 

Brendan Burgess

Founder
Messages
38,526
i have added this:


The tax treatment of pensions may well change over the coming years. Likewise, marginal tax rates may rise or fall. This post is based on the current treatment and changes planned in the 4 year plan. The new government may have other changes in mind.
 
Z

z107

Guest
It contributing to a pension based on the hope that tax treatment will be favourable at retirement age?

If this is the case, I'd rather take the money now and pay PAYE/PRSI/USC. The sooner my money is out of government reach, the better.
 

mmclo

Frequent Poster
Messages
265
But none of this is definite, there is also a proposal to tax the funds which seems fairier as it takes a small amount across the board thus maintaining an incentive to contribute

I wonder how many people will have 600k and more in their fund in 10-20 years. Not me I'd say and not many middle income earners. Are there any firm figures or estimates on this??
 
N

Niall D

Guest
I have been paying AVC's into my pension this year. While I have received tax relief at 41 %, I have not been receiving PRSI relief as that stopped after last year's budget. I now want to claim PRSI relief for these 2011 AVC contributions against the tax I paid last year.

I contacted the PRSI department, in Limerick, and they said they couldn't refund me until Revenue put it up "on the system". Revenue have responded that I am due no further tax refund.

Does anyone know how I can progress this to get the PRSI relief on my pension contributions before the 31st October deadline ?.
 

LDFerguson

Frequent Poster
Messages
4,071
I think the issue may be that you've received tax relief on these AVCs in the 2011 tax year through salary deduction, but are seeking to claim PRSI relief on them in respect of 2010 tax year.

I think the tax and PRSI relief in respect of the same contributions may have to be for the same tax year. But I'm not a tax expert, so you'd need to get this clarified.
 

JoeRoberts

Frequent Poster
Messages
494
ref Niall D


Yes, they have to be for the same tax year.

The PRSI dept only give a refund once the revenue have processed the PAYE side.
You could make a claim on Form 12 for tax year 2010 for the contributions you made through payroll this year. You will get a tax rebate for 2010 but you will need to keep that to repay the tax relief you already got in 2011 through your payroll. You could manage this by submitting a Form 12 for tax year 2011 in January and repaying the tax relief.

Once the Revenue issue a balancing statement for 2010, go to the PRSI people with that.
 
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mmclo

Frequent Poster
Messages
265
Of course goes without saying you should take in to account employers contribution which often gets forgotten. This may make contributing more worthwhile for 20% tax payers?
 

OMD

Frequent Poster
Messages
30
Sorry if this is a stupid question. I am self employed. I am paying the maximum amount (percentage of income) into my pension for 2012 via monthly direct debit. However, for 2011 I did not pay the max into the PRSA. I now want to pay extra into the fund and declare it against my tax liability for 2011. How do I actually do this? Can I just pay extra and then declare it in October on my tax return or do I need to do anything special?
Thanks
 

LDFerguson

Frequent Poster
Messages
4,071
Cleanest way is to pay a lump sum by cheque into your fund. You'll then get a tax certificate from the pension provider in relation to this contribution. As you say, declare the contribution in your tax return in October. You don't actually need to send in the tax certificate but hold on to it as Revenue reserve the right to ask for it later.

Contribution for 2011 tax year needs to be made before the end of October 2012 as well as filing and paying your tax return. You usually get a couple of extra weeks if you pay and file using www.ros.ie.
 
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