Hopefully someone can clear up something for me …
I am 41, so I can contribute 25% of my gross salary to a pension and get tax relief on it. This tax relief will be at my marginal rate, i.e. 40%. The general advice would be that maximising one’s tax relief allowances is very tax-efficient so I would like to do it. I will, if I remain on my present course, retire at 61.
At the moment, I am contributing
‘Dept. Of Education’ Pension 6%
Spouse and Child Pension 1.5%
Notional % Contribution, I am not sure of (For ease of use, let’s say 2.5%)
So, 6% + 1.5% + 2.5% = 10%.
Therefore, am I ‘wasting’ 15% of my tax-relief allowance by not utilising it? (Allowable Tax Relief 25% minus Claimed Tax Relief 10% = 15%)
My question is; can I over-contribute to my pension via AVCs, get tax-relief now, but pay tax on drawdown/in retirement?
I understand that my tax-free lump sum at retirement will be 1.5 x Final Salary. But, can I make that lump sum bigger and pay tax on the excess (anything above 1.5 x Final Salary)? For example,
Final Salary = €80,000; therefore, Tax Free Lump Sum = €120,000.
But could I use AVCs to increase that pot to, say €150,000, take the €120,000 tax free and pay tax on the excess €30,000? Or is this just simply not allowed by Revenue?
I’ve drawn up two scenarios below. Feel free to point out any errors that may be present.
Pension Investment
With tax relief, I pay €60 in and get €100 invested.
€100 compounded at 4% per annum for 20 years amounts to €219.
In 20 years time, when the time came to pay tax, I would pay tax on the €219.
Let’s assume I pay 52% tax on this (40% income + PRSI + USC); 52% of €219 = €114
(I think this would be correct; it would be seen as income, therefore taxed as such.)
So, I would be left with €219 - €114 = €105
So, my €60 has grown to €105.
Non-Pension Investment: Exit Tax Investment (I’ll assume, for purposes of illustration, that I’ll invest it in a fund that is subject to Exit Tax).
With no tax relief, I pay €60 in and get €60 invested.
€60 compounded at 4% per annum for 20 years amounts to €131.
In 20 years time, when the time came to pay tax, I would pay tax on the €131.
Let’s assume I pay 41% exit tax on this; 41% of €131 = €54
So, I would be left with €131 - €54 = €77
So, my €60 has grown to €77.
Any insights greatly appreciated!
I am 41, so I can contribute 25% of my gross salary to a pension and get tax relief on it. This tax relief will be at my marginal rate, i.e. 40%. The general advice would be that maximising one’s tax relief allowances is very tax-efficient so I would like to do it. I will, if I remain on my present course, retire at 61.
At the moment, I am contributing
‘Dept. Of Education’ Pension 6%
Spouse and Child Pension 1.5%
Notional % Contribution, I am not sure of (For ease of use, let’s say 2.5%)
So, 6% + 1.5% + 2.5% = 10%.
Therefore, am I ‘wasting’ 15% of my tax-relief allowance by not utilising it? (Allowable Tax Relief 25% minus Claimed Tax Relief 10% = 15%)
My question is; can I over-contribute to my pension via AVCs, get tax-relief now, but pay tax on drawdown/in retirement?
I understand that my tax-free lump sum at retirement will be 1.5 x Final Salary. But, can I make that lump sum bigger and pay tax on the excess (anything above 1.5 x Final Salary)? For example,
Final Salary = €80,000; therefore, Tax Free Lump Sum = €120,000.
But could I use AVCs to increase that pot to, say €150,000, take the €120,000 tax free and pay tax on the excess €30,000? Or is this just simply not allowed by Revenue?
I’ve drawn up two scenarios below. Feel free to point out any errors that may be present.
Pension Investment
With tax relief, I pay €60 in and get €100 invested.
€100 compounded at 4% per annum for 20 years amounts to €219.
In 20 years time, when the time came to pay tax, I would pay tax on the €219.
Let’s assume I pay 52% tax on this (40% income + PRSI + USC); 52% of €219 = €114
(I think this would be correct; it would be seen as income, therefore taxed as such.)
So, I would be left with €219 - €114 = €105
So, my €60 has grown to €105.
Non-Pension Investment: Exit Tax Investment (I’ll assume, for purposes of illustration, that I’ll invest it in a fund that is subject to Exit Tax).
With no tax relief, I pay €60 in and get €60 invested.
€60 compounded at 4% per annum for 20 years amounts to €131.
In 20 years time, when the time came to pay tax, I would pay tax on the €131.
Let’s assume I pay 41% exit tax on this; 41% of €131 = €54
So, I would be left with €131 - €54 = €77
So, my €60 has grown to €77.
Any insights greatly appreciated!