Being self-employed can come with a suite of perks – being your own boss and having control of your own time – but also some downsides, including funding your own pension. Options for these individuals include retirement annuity contracts (RACs) and Personal Retirement Savings Accounts (PRSAs).
Self-employed individuals work for themselves, which means there is no employer to make a pension contribution alongside their own, says Sinead McEvoy, head of retirement solutions at Standard Life. “They can, however, make personal contributions to a PRSA or personal pension of between 15 per cent and 40 per cent of their income, depending on their age, and that income will not be subject to income tax.
“The main difference is that an employer-sponsored scheme or employer-paid PRSA will have an employer contribution in addition to your own. In effect, there’s more money being contributed to a pension on your behalf.”
There are two types of pension arrangements available to the self-employed, neither of which are considered an ‘occupational pension arrangement’, says Ian Reidy, senior financial planning manager, RBC Brewin Dolphin, Ireland.
“These are Retirement Annuity Contracts (RACs) – more commonly referred to as a personal pension. This is a pension contract between an individual and a life assurance company. While existing RACs can continue to be issued by the life companies, from January 1st, 2024, Revenue will no longer approve applications for new RACs. Next, there is a Personal Retirement Savings Account, known better as a PRSA.”
There are no limits to the number of RACs or PRSAs that a self-employed person can hold and there is nothing to prevent that person from having a PRSA and a personal pension, says Reidy. “However, whether it is an RAC or a PRSA that a self-employed individual has, that individual is subject to two main limitations concerning tax relief on pension premiums paid in.”
There is often a question faced by the self-employed when their business reaches a certain level of success as to whether they should incorporate or remain operating as a sole trader or partnership, says Gavin Moran, head of wealth management, WTW in Ireland. “Incorporation gives access to limited liability – although not available to medical professionals, lower corporate taxes, but also a greater ability for pension planning where the business has scope to make generous pension contributions, provided of course that the company has the resources.
“The same personal contribution rates are also allowed so it is fair to say that there is scope for a company director to build up a larger pension fund than a sole trader.”
Self-employed people have the option to reduce their income tax liability by investing in a pension, says Moran. “This does differ slightly from a salaried employee who may also receive an employer pension contribution on top of being able to make their own personal contributions.
“However, a self-employed person is restricted to making only a personal contribution which is age-related and capped to a maximum earnings limit for pension purposes of €115,000.”
Provided that the pension contribution is made and invested in the pension before the 31st of October (or the 14th of November if you generally file your return electronically), you can backdate the payment to reduce their tax liability for 2023 says Moran. “This represents a change to previous years where the pension payment had only to be made before the due date. The money must now be invested in the pension scheme so you should not now transfer money on the last day to your pension provider and expect that this will qualify for backdated tax relief.”
Currently, all individuals in the State are subject to the Standard Fund Threshold (SFT), says Reidy. “In simple terms, it’s a limit of €2 million on the value of all pension arrangements that you may hold and any value more than this is subject to less favourable tax treatment.
“Budget 2025 has outlined positive changes to the Standard Fund Threshold, signalling incremental increases to this limit from 2026,” says Reidy. “If incorporating is not feasible, the next best option is to explore the opportunity around spousal employment. Although the individual is self-employed and restricted by the pension limitations, a spouse, employed in their business is not subject to these restrictions.”
A financial adviser will be best placed to advise people on their individual needs and how to maximise their pension savings, says McEvoy. “However, contributing to either a RAC or a PRSA are compelling options that offer self-employed people flexibility. Both structures are the main pension products used by self-employed individuals.
“They are personally owned pensions that let you save for retirement on your own terms; you decide how often and how much you want to contribute. Tax relief is available subject to age-related limits.”