Tax Advantages: Pensions are a very tax-efficient way of saving

When you contribute to a company pension scheme, the net cost or the 'real' cost to you isn't as high as you would initially think. The Government provides generous tax relief at your highest tax rate to encourage pension saving.

In other words if your income levels bring you into the higher income tax bracket then you get tax relief at that rate. Likewise, if your income level means that you are paying tax at the lower rate only, then this is the rate at which you get the tax relief.

The examples below illustrate the tax advantages of saving into your company pension plan.

How pension tax relief works

When you decide how much you need to contribute to your pension to provide you with a comfortable retirement, your payroll area will arrange all the rest and give you the tax relief deductions at source.

What this means is that if you decided for example, to save €100 a month into your pension plan, your payroll department will arrange for that amount to be paid into your pension plan directly from your salary. They will also calculate and apply the tax relief that you are entitled to. Your take-home pay will only reduce by the difference.

For example, for every €100 you contribute, your take-home pay will only be reduced by €59 (if you pay tax at 41%).

This means that should you contribute €300 a month, your take-home pay will only go down by €177.

Examples of income tax relief

Are there any limits on pension saving?

It would be nice if you could save unlimited amounts into your company pension plan and get tax relief, but because the tax breaks are so good, the Government puts limits on them. These limits are very generous and are based on your income and age and they are subject to a maximum earnings limit*.

See the table below to find out the percentage of your income that you can get tax relief on when contributing to a pension plan. There are also limits on the benefits that may be provided at retirement.

If you are a member of a occupational pension scheme, the maximum contribution levels for tax relief relate to the total employee contributions to any occupational pension schemes.

For Group PRSAs, these levels include the employee as well as any employer contributions.

PRSAs: employer contributions

Any employer contributions made to a PRSA on your behalf are treated as a Benefit-in-Kind (BIK). While these contributions do qualify for income tax relief, they don't qualify for relief from PRSI or the Universal Social Charge.

Earnings limit and maximum fund size

*The maximum earnings limit in 2011 is €115,000. The earnings limit is subject to review and change each year. There is no maximum payment that can be made, but you may only claim tax relief within the above limits. There are also limits on the benefits that may be provided.

There is a maximum Revenue-allowable total pensions fund on retirement. This is known as the Standard Fund Threshold (STF).

Under current legislation, the maximum pension fund allowable for tax relief purposes is €2.3 million (this maximum amount includes any pension benefits already taken together with pension benefits yet to be taken). The maximum will apply to the aggregate value of all pension provision held for an individual. Any fund in excess of this amount will be liable to a once off income tax charge at the top rate of tax (currently 41%) when it is drawn down on retirement. This limit may be adjusted annually in line with an earnings index.

Please note that the Revenue Commissioners have also placed limits on the total amount that can be contributed by you and your employer to your occupational pension plan.

However, if you are concerned by these limits please consult your financial advisor for further details.

WARNING: If you invest in this product you will not have any access to your money until your retirement date.

WARNING: The value of your investment may go down as well as up.

WARNING: The income you get from this investment may go down as well as up.

WARNING: The value of the fund may be affected by changes in currency exchange rates.

WARNING: If you invest in this product you may lose some or all of the money you invest.