John O’Connor of Omega Financial Management (left) advises dentists that as your pension contribution is an allowable expense in your tax bill, writing a cheque for it is deemed to be a legitimate business cost. As such, even though you own the pension fund that you are paying into, it is still treated as a business expense for you and reduces your taxable profit in that year.
Does it reduce preliminary tax or just the balance of last year’s tax?
So, in October 2015 you will submit your income tax return for the tax year 2014 and pay the remainder of the tax in excess of the preliminary tax you paid last year. In addition, you will be required to pay your preliminary tax for 2015. This figure is likely to be 90% of your expected 2015 income tax liability or 100% of last year’s figure. Therefore, if you pay €20,000 into your pension in 2015 for the tax year 2014, you will, in effect, reduce your preliminary tax obligation for 2015. However, remember that you must make the contribution when the time comes a year later or your balancing payment will go back up again.
Here are the percentages of income you can contribute. Only €115,000 of income is allowed, and NRE stands for net relevant earnings.
|30 – 39||20%||NRE|
|40 – 49||25%||NRE|
|50 – 54||30%||NRE|
|55 – 59||35%||NRE|
|60 and over||40%||NRE|
What are my pension entitlements and how do I benefit at age 60?
When you turn 60 you have a variety of options. If you wish to move some or all of your pension funds into ‘post retirement’ funds then you have the option to do so. Most people decide to avail of the cash lump sum, which is there for them if they choose. This means that they can take up to 25% of the fund out in cash, the first €200,000 of which is tax free and the remainder, up to €500,000 is taxed at 20%, with marginal rate income tax for anything above this level. The maximum fund you can have is €2m for those lucky enough to reach that level. It is likely that your remaining 75% will then be invested to your appropriate risk level, to provide you with an ongoing income from retirement funds. You can buy an annuity if you choose but in most cases rates are so low that it doesn’t make financial sense. If you do have a high annuity rate locked into your pension you would probably be wise to avail of it. However, most of us will be investing in what are called ‘approved retirement funds’ (ARFs) and ‘approved minimum retirement funds’ (AMRF). If you do not have a pension of at least €12,700 per annum then you must invest your first €63,500 in an AMRF. All funds above that are invested in an ARF. The main difference between these two is that you must take an annual income of 4% from an ARF, and with funds in an AMRF you have the option to take up to 4% annually.