Saving for your retirement whilst paying less tax seems like a no brainer, but when it comes to pensions, only 47 per cent of Irish workers currently have one, according to Aviva Ireland's 'Mind The Gap' pensions savings report.
Aviva’s research found that Ireland has the second largest pension gap in Europe. This is the amount of money people are currently saving for their pension versus the income they will most likely need to provide an adequate standard of living for themselves in retirement.
According to the research, Ireland’s pension gap has increased by 38 per cent since 2010, compared to an increase of 6 per cent across Europe. It found that Irish workers need to save €27.8bn more to make up the shortfall.
Richard Hales, retirement solutions manager at Aviva Ireland, says that any time of the year is a good time to start a pension, but October/November is traditionally known as Pension Season, and he is encouraging people who do their own tax returns, to start a pension now, as it's a good opportunity to reduce their tax bill.
"The Income tax deadline is primarily there for the self-employed such as vets, accountants, solicitors and doctors to make appropriate tax returns to the Revenue Commissioners. Their tax year is January to December and on the following October 31st, they're filing their returns and paying any outstanding tax that they have for the previous year. They're also paying what is known as preliminary tax for the current year, so it's a very busy time for these individuals. Their deadline is extended to November 14th 2017 if they are paying online, as Revenue wants to move people to an online rather than a paper-based system. You need to make sure you are registered for ROS, and are set up to pay and file online to avail of this extension."
How do pensions fit into that?
“A pension is a great way to reduce your tax bill. In very simple terms, when you pay a pension contribution, you can reduce your tax bill by the tax relief you get on your pension contribution. It’s a big opportunity to pay a contribution and backdate it to 2016 for income tax relief when you are doing your final returns in 2017,” he says.
Who can benefit?
According to Richard Hales, the people who can take advantage of this are those who have relevant earnings from self-employment, or those who are in non-pensionable employment. “Say you’re working for a company and they don’t have a pension scheme in place, then your salary from there is non-pensionable,” he says. Employees can also make Additional Voluntary Contributions (AVCs) to their pension scheme and avail of tax relief at any time.
The amount of pension contribution you can get tax relief on is based on age-related limits. If you’re in your 20s, you can put in 15 per cent of your net relevant earnings, if you’re in your 30s you can put in 20 per cent of your net relevant earnings and so on, up to those over age 60 who can put in 40 per cent of their net relevant earnings. “That’s capped at a limit of €115,000 so if you’re lucky enough that your salary is over €115,000, in that case your pension contributions are capped at that amount,” he says.
Why should workers consider this now?
"Let's say you retire today on a salary of €50,000 a year and you have made no pension provision. When you retire your income will drop to approximately €12,000 per annum which is payable through the current State pension. It's about making people aware and asking are you going to have enough money in retirement, which is effectively the longest holiday you'll ever have. The Mind the Gap calculator, which is on our website, takes all your details, including age, salary, any pension provision you have made for yourself already and it shows you what your pension gap is. We want people to use this as a wake up call to start funding for their retirement"
In order to get people saving for their retirement, the Government has incentivised private pensions, he explains.
If you are a 40 per cent tax payer and you pay €100 into your pension, you get tax relief of 40 per cent which is €40, so the net cost to you is €60. If you are a 20 per cent tax payer, the net cost is going to be €80 for every €100 you pay in. At the far side of it, you get a lump sum which is tax free up to certain limits, depending on how much money you put in there and the type of pension you’re in.
“The whole idea is to incentivise people to start a pension now, because let’s face it, you will still want to be able to do the things in your retirement that you enjoy doing now .
Case Study #1: Lisa, a self-employed vet
Lisa is a self-employed vet, 35 years of age and pays 40 per cent tax. In October 2017, she pays a pension contribution of €24,500 to a Personal Pension Plan. Lisa’s net relevant earnings are as follows: 2016 - €60,000 and 2017 - €62,500.
If Lisa makes a relevant pension contribution, she can get tax relief on up to 20 per cent of her net relevant earnings in the current tax year (ending December 31st 2017). Under backdating provisions she can also claim up to 20 per cent of her net relevant earnings in the previous tax year (ending December 31st 2016) provided she pays a relevant pension contribution before October 31st or November 14th 2017 if she uses ROS.
Lisa can split her contribution as follows:
| Tax Year | Net relevant earnings | Maximum contributions 20% | Tax relief @ 40% | Net Cost |
| 2016 | €60,000 | €12,000 | €4,800 | €7,200 |
| 2017 | €62,500 | €12,500 | €5,000 | €7,500 |
Case Study #2: Ciaran, a self-employed actor
Ciaran is a self-employed actor, 25 years of age and a 20 per cent taxpayer. In October 2017 he pays a pension contribution of €7,050 to a Personal Pension Plan. Ciaran's net relevant earnings are as follows: 2016 - €22,000 and 2017 - €25,000. Should Ciaran make a relevant pension contribution, he can get tax relief on up to 15 per cent of his net relevant earnings in the current tax year (ending December 31st 2017). Under backdating provisions he can also claim up to 15 per cent of his net relevant earnings in the previous tax year (ending December 31st 2016) provided he pays a relevant pension contribution before October 31st or November 14th 2017 if he uses ROS.
Ciaran can split his contribution as follows:
| Tax Year | Net relevant earnings | Maximum Contributions 15% | Tax relief @ 20% | Net Cost |
| 2016 | €22,000 | €3,300 | €660 | €2,640 |
| 2017 | €25,000 | €3,750 | €750 | €3,000 |