The most tax-efficient way to save for your retirement is to pay into a personal pension plan, especially if you are a sole trader.

All pension contributions are fully tax allowable up to certain limits based on age and income. An individual’s earnings are currently capped at €115,000 for the purposes of granting tax relief.

The tax allowable amounts range from 15% to 40% of income, based on age from under 30 years to 60 years and over.

Tax relief on contributions

For example, if you are aged between 40 and 50 years old, you can contribute up to 25% of maximum income €115,000, and avail of tax relief at the marginal rate. If your income is 100,000, and you are currently being taxed at 40%, you can contribute up to €25,000 maximum (25% of income) to your personal pension and get tax relief at 40%, so in fact the pension contribution only costs you €15,000.

Tax free lump sum

If you have a pension fund of €800,000 or more, the maximum tax-free lump sum you can avail of is €200.000. Any amount above that up to €300,000 is subject to tax at 20%. Any amount above €300,000, tax is payable at your marginal rate.

Pension options on maturity

For people who took out pensions prior to 1999, the only option on maturity was to take 25% of the fund as a tax free lump sum. The remaining 75% was paid out as an annual pension for life, known as an annuity. Often in these cases your pension died with you.

Since the 1999 Finance Act, there are other options, the Approved Retirement Funds (ARF) and Approved Minimum Retirement Funds (AMRF) were introduced. These allowed an individual to keep their fund and draw it down as required, but subject to certain conditions and tax treatments. An individual, after they died could also pass on the pension fund to their next of kin.

The Pensions Authority

The Pensions Authority provides information services to help members of pension schemes understand their rights to ensure that their pensions are fully protected. It also provide information for trustees and pension providers.

Reader query

Dear Money Mentor,

I am in my late 50s and my husband and I are going through a separation/divorce. We have a succession partnership in place to deal with the farm business which I am agreeable to. It involves my son and his young family. I have no personal pension (except I may get the old age contributory pension when I reach the required age). However, my ex-husband has always paid into a personal pension plan. My question is: am I entitled to any of that pension? I live in the family home and I have a small part-time job. My other two children are settled and have their own careers. I gave up my career when I got married and worked at home.

Regards,

Mary

Margaret writes

Dear Mary,

In a separation/divorce you are entitled to a fair and equal share of all the assets held by both you and your ex-husband. You could avail of a share of your ex-husband’s personal pension by way of a Pension Adjustment Order (PAO).

This means the court can decide that the pension is divided into whatever shares it considers appropriate. A PAO is a binding court order which would require a proportion of your husband’s pension benefit to be paid to you. This can be made at the same time as a judicial separation or divorce. If this happens you will be free to invest this as you see fit, and have your own pension policy in your own name.

Once the policy reaches maturity, and on retirement, you can take 25% of the value as a tax free lump sum.

However, a court may decide not to grant a PAO on a pension if the court believes there is no financial merit in doing this. Instead, the court may decide to take into account the value of the pension, and make a decision based on all combined financial resources available.

With regard to the State pension, this is paid from age 66, currently. Your social insurance record will determine if you qualify for the full contributory State pension or not. As you worked before and you are now working (part time), you should check your social insurance record to ensure that it is correct (mygovid.ie). Get in touch with the Department of Social Protection if you find it is incorrect. You should also check you are correctly credited for time spent outside of the workforce to rear your children. All this will ensure you will can avail of the correct amount of contributory State pension at age 66.

It would be a good idea to avail of independent professional legal advice before finalising your separation/divorce.

Kind regards,

Margaret

Read more

Money Mentor: changing or challenging a will – get the right advice

Money Mentor: joint assessment or be taxed separately in farming