A pension remains the most tax-efficient way to save for your retirement. Contributions to an approved pension scheme, whether that’s a company pension, PRSA (Personal Retirement Savings Account), or personal pension including any AVCs, offer 3 main tax advantages:
- Tax Relief on Contributions
You can claim income tax relief on the money you pay into a pension, at your highest marginal tax rate (20% or 40%). This means every €100 you invest could cost you as little as €60, depending on your tax band. Contribution limits are linked to age, ranging from 15% of net relevant earnings if you’re under 30, up to 40% once you’re over 60 (subject to an annual cap of €115,000). - Tax-Free Investment Growth
The money you invest in a pension grows free from income tax and capital gains tax. This compounding effect makes a pension one of the most powerful long-term wealth-building tools. - Tax-Free Lump Sum at Retirement
On retirement, you can usually take up to 25% of your pension pot tax-free. This is subject to limits (€200,000 lifetime cap). This can provide a significant boost to your financial flexibility.
AVCs and Single Contributions
Remember that if you’re part of a company pension scheme, employer contributions can be one of the most valuable benefits you receive. Unlike salary, which is subject to PAYE, USC, and PRSI, employer pension contributions are free from these deductions. Negotiating higher employer contributions can be a tax efficient way to increase your retirement savings.
For anyone in an employer scheme, making an Additional Voluntary Contribution (AVC) before the tax deadline can help reduce your taxable income while boosting your retirement savings. This is also of benefit to anyone in self-employment with their own personal pension or PRSA which they can contribute to. By acting before the cutoff date, you will not only maximise the potential tax relief but also give your pension pot more time to grow.
ARFs and Retirement Income
When you reach retirement, you’ll need to decide how to draw income. Beyond the tax-free lump sum, the balance of your pension can be transferred into an Approved Retirement Fund (ARF). An ARF allows you to keep your pension invested, drawing income as needed, rather than purchasing an annuity. While withdrawals are taxable, careful planning can help you manage your tax liabilities and ensure your funds last throughout retirement.
Your Future Fund
The new “My Future Fund” pension auto enrolment scheme is due to be rolled out from 1st January 2026. This will also elevate the tax benefits of a pension. It will allow a large number of people, who currently have no arrangement in place, to start their pension planning in a structured and cost-efficient way.
Next Steps
Tax-efficient retirement planning can be availed of right from the start of your pension to your retirement and beyond. At every stage you can make full use of tax reliefs, maximise employer contributions, drawdown lump sums and plan how to avail of your income in retirement to reduce your tax liability. But remember that a retirement plan needs nurturing. Ensure you carry out regular reviews. This will help check that your strategy remains aligned with any changes in law, investment performance and of course your own personal goals.
At Life Goals, we’d be delighted to help you with your pension strategy to make it as efficient as possible. We can guide you through the details and help you decide which works best for you. Just get in touch if you’re ready to connect!