Pension tax relief - How it helps

Pension tax relief makes it more attractive to save for your retirement by giving you generous tax breaks on the money you place in your pension. Essentially, your tax relief is provided in three phases;

  • Tax relief on contributions
  • Tax relief on investment return
  • Tax free lump sum at retirement

1. Tax relief on contributions

Sample Tax relief: Pension of €100 per month
Tax band 41% 20%
Tax relief €41 €20
You pay €59 €80

There are limits to the amount of tax relief available to you based on your age at the date of making the contribution. The table below outlines these limits.

These limits include any employee/AVC contributions you might be making to company pensions. They also include the total employee and employer contributions to PRSAs and Personal Pensions. So any employer contributions over these limits will result in a Benefit in Kind liability for the employee.

Tax relief is not available on earnings which are more than €115,000 (January 2011.

2. Tax relief on investment return

Your contributions are invested in pension funds, which are exempt from Irish Tax. This means pension funds benefit from being able to reinvest the non-taxed returns to generate higher future returns.

3. Tax free lump sum at retirement.

Under PRSA rules, at your retirement date, you are entitled to take 25%* of your accumulated pension fund tax free, subject to a total limit of €200,000. The remainder of the fund can be used to either purchase an annuity, stay invested in your PRSA or invest in an ARF.

NOTE: Tax relief is not guaranteed. To claim tax relief, you can apply to your Inspector of Taxes to adjust your tax credits. Contributions deducted from salary will receive immediate tax relief.

For PRSA AVCs the tax free lump sum will depend on the tax free lump sum you receive from the main scheme. All information correct as at 24 January 2011.

The income paid from an annuity and money drawn down from the PRSA or ARF will be subject to income tax and any PRSI and Universal Social Charge that applies at that time. A minimum of 5% of the ARF is assumed to be drawn down each year for income tax purposes.