Tax Rates on Pension

J

johnmar

Registered User
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Hi,
Can someone please advise what the tax rates are for paye pension, excluding lumps sums. I would be entitled to full state pension and have DC pension. I am thinking of making AVC's but am unsure of how my pension earning would be taxed.
Thanks.
 
Pensions are taxed like wages & salaries. Currently over-66s have an Age Tax credit but those working have a PAYE credit which is worth more.

When you retire, you may be eligible for a tax-free payment from the pension fund but that depends on the structure of the fund and the law.
 
After taking the retirement lump sum (tax free up to €200,000) out of the DC fund, you must use the balance to provide a retirement income- either buy an Annuity or invest in an ARF from which you draw down an income. Any such retirement income plus any State Retirement Pension is potentially liable to Income Tax if it exceeds the threshold- €18,000 for a single person or €36,000 for a couple.
It is arguable that making AVCs is tax effective:
- yes it will increase your tax free lump sum , probably by 25% of the AVC fund
- yes you will get tax relief on the contributions
- but any additional pension income will be potentially taxable in retirement

So if you will get tax relief on the AVCs at top rate - 40% - but any additional pension income was going to be below the threshold or only taxable at the lower rate of 20%, then it may be a tax effective strategy. However if you will still be in the top tax rate after retiring, then it may not make much sense since your marginal tax rate on the additional income in retirement will be 40% + USC ( circa 44% total).
 
Crazy advice above; it doesn’t matter if you’re a 40% rate taxpayer when you’re drawing down your pension benefits.

People get blinded by the taxation piece in terms of relief on the way in and tax on the way out.

A higher rate tax payer gets to invest the 40% tax relief in a tax-free wrapper for a prolonged period of time. The individual might pay 40% income tax on the way out but PRSI disappears at age 66 and the USC rate tends to drop at age 70. But the key point is that the individual gets to invest the €40 tax relief on every €100 in a tax-free wrapper with zero income tax or CGT. It’s the free use of that money and the 8th wonder of the world, compounding, that needs to be highlighted.
 
[QUOTE="Gordon Gekko

People get blinded by the taxation piece in terms of relief on the way in and tax on the way out.”

My reading of the original post is that the poster is getting close to retirement and in such a case the taxation consequences are important. We all know that compounding is very valuable, but only over time. If your time horizon is short (my assumption) then comparing the tax relief with the tax rate on the resulting additional income is valid, not crazy.
 
If you have 600k total in your pension

And you take 25% 150k lump sum

Then the mandatory 4% withdrawal of the 450k equals 18k

But 18k tax credit for old age means no tax due on the first 18k

Married couple get 36k tax credit
 
Thanks all for replies. I am still someway of retirement. So my state pension plus personal pension is taxable above 36K as a married couple. I'm assuming above 36K tax is applied at lower tax rate for a certain amount of earning before moving to the the higher band. Can anyone advise what the bands are as a married couple (might be same/similar to paye tax bands). Thanks again.
 
Over 66 people are exempt from tax below 18/36k.

After that the normal rates apply.

There is what's called marginal relief for people just above 36k.
 
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