4 Reasons For A Pension Review 2023

by | Oct 29, 2021 | Retirement & Pensions

Pension Review 2023: Individuals who both pay and file their tax returns
through the Revenue On-line Service (ROS) have until Wednesday 15th November 2023 to pay a pension contribution and elect to backdate the income tax relief against the 2022 tax year. Those who do not qualify for the ROS extension must do
this by 31st October 2023

4 Reasons For A Pension Review 2023 | Advice First Financial Services

 

1: The tax benefits of pensions are extremely valuable

Pension contributions are one of the few remaining means of gaining marginal rate tax relief today. If you are in a position to make additional pension contributions, do this before the tax deadline and you can gain tax relief against your 2022 income. This would be one good use of the increased savings you put away during the pandemic! Give us a call and we can guide you as to any contribution limits that would apply to you.

Who should file a self-assessment tax return?

  • Self-employed
  • Propriety directors who own more than 15% of a company
  • Those with non-PAYE income
  • Members of company pension schemes who pay AVCs  and want to backdate income tax relief to 2022

Backdating income tax relief

Those self-employed who want to pay a personal pension or PRSA contribution and backdate the income tax relief against their 2022 earnings need to do the following

    1. Pay the contribution to the life office or PRSA provider on or before the deadline,
    2. Submit their tax return to Revenue on or before the deadline The deadline is 15th November 2023 for those who pay and file their returns using ROS. If there is any doubt about qualifying for the ROS extension, we would recommend clients pay their pension contributions and file their tax return by 31st October to ensure they meet the deadline

    Claiming Income tax relief on personal pension or PRSA contribution

    In order to claim income tax relief on contributions to a personal pension or PRSA you must be “chargeable to tax in respect of relevant earnings”. Relevant earnings refer to the income of individuals who are:

    • Self-employed: (income from a trade or profession taxed under Schedule D, Case I or II)
    • Employees: (Schedule E, PAYE and not a member of a company pension scheme)
    • Directors of companies: (Schedule E, PAYE and not a member of a company pension scheme

    Can employees avail of the tax deadline?

    Employees can also pay a pension contribution and set it against their 2022 tax bill.
    To claim income tax relief on their pension contribution, employees must pay their contribution to the appropriate pension contract for their circumstances.

    • PRSA or Personal Pension: where the employee had Schedule E income during 2022 but was not a member of their employer’s company pension scheme.
    • AVC or PRSA AVC: where the employee had Schedule E income during 2022, was a member of their employer’s company pension scheme during 2022 and is still in that same employment.

    Once an employee permanently leaves employment where they were a member of a company pension scheme, they cannot make any further pension contributions in respect of the income from that employment.
    Note: a termination payment made on leaving employment (under Section 123 TCA 1997) is not considered income for pension purposes. This would include termination payments on redundancy, payment in lieu of notice and other ex-gratia payments.

    See below for examples of tax relief at work.

    2: Relying on the state won’t get you far in retirement

    In Ireland, the state provides an old age pension to qualifying people. The maximum level of this pension is €265.30 per week for a single person – this is hardly going to deliver a lifestyle of luxury. Even at this, the state pension scheme is under extreme pressure. The ratio of people working compared to retired people will reduce from 5 to 1 today, to 2 working to 1 retired by 2050. There will be fewer people paying in and more seeking payment from the system*.

    The State retirement age in Ireland is currently 66. The State pension age was set to rise to 67 in 2021 before the government reversed the change. If relying on the State pension, a person must be 66 years of age in order to qualify. However, the age of retirement is set to increase over the next few decades. By 2028 it could be 68 years of age

    Governments around Europe are looking for a long-term solution to the problems facing State pensions. And the Irish government is no exception. It has already taken measures to begin addressing the issue: by increasing the age at which the State pension is paid.

    This means that if you were born in 1961 or later you won’t qualify for the State pension until you’re 68. So, while you may hope to retire at 60 or 65, a potentially significant part of your retirement income may not be paid until you reach 68.

    The question you need to ask yourself is, if you hope to retire at 60, how will you provide for yourself financially in those intervening eight years?

     

    3: Now is the time to take control Is a Lump-Sum pension right for you?

    The longer you pay into your pension scheme, the more you can hope to receive when you retire, as you let increased contributions, time and compound interest get to work.
    We’re often asked how much you should pay into your pension scheme. If possible, you should look to maximise the tax relief opportunities, but otherwise, a very rough rule of thumb is that you should aim to save “half your age”.
    So for example, if you are 40 years old, you should aim to save 20% of your income each year from now until retirement to build up a decent fund. If you wait until you are aged 50 to start, you should then aim to save 25% of your income each year. But this is only a very rough calculation.

    A full review of your pension circumstances will enable us to develop a far more tailored picture for you, taking into account any existing benefits that you have already built up.

    The maximum Pension contribution you can claim tax relief is subject to age-related limits. See below.

    Age % of Net Relevant Earnings
    Up to age 29 15%
    30-39 20%
    40-49 25%
    50-54 30%
    55-59 35%
    60+ 40%


    Notes:

    1. An earnings cap of €115,000 applies to contributions. Pension contributions made by you in 2022 must be deducted from the maximum tax-allowable contribution calculated based on these limits.
      2. Age is age on your birthday in 2022.
      3. Retirement benefits are subject to separate Revenue limits.
      4. Reference throughout this document to ‘Tax’ refers to ‘Income Tax’.

    4: Life expectancy is increasing

    Savings in retirement will need to last on average for at least 20 years in retirement for female clients who are aged 66, and 17 years for males when they retire. Because of medical science and better diets etc., these periods are expected to increase. Indeed it is reckoned that the first person to live to be 150 years of age has already been born! While that is unlikely to be you, more and more people will now be retired for 30 – 35 years. What size of pension fund would you need to maintain your lifestyle for that period? This is another reason for a pension review now.

    Right now is the time to review your pension. Give us a call, we’ll be delighted to help.

    *Sources: Irish Life, revenue.ie, gov.ie – National Risk Assessment 2019 & Health in Ireland Key Trends 2019

    Retirement Plan Considerations – It’s Not All About Money

    We all have a wish list of the things we want to do when we retire, and we want to enjoy this time in of lives to the fullest. Quality of life peaks at age 68 – when life is at its best! TILDA found that people aged 80 enjoy a similar quality of life as people aged 50. It’s only from age 80 onwards that quality of life starts to decrease.

    In a recent study on ageing the Irish Longitudinal Study on Ageing (TILDA), is a large-scale, nationally representative, long-term study on ageing in Ireland. It collects information from adults aged 50 years and over resident in Ireland and is one of the most comprehensive research studies of its kind both in Europe and internationally. TILDA’s Vision is to make Ireland ‘the best place in the world to grow old’ by studying the health, wealth and quality of life aspects of ageing. We thought this research was definitely worth sharing with you. Read more on what’s in store in Retirement.

     

    What the future holds

    We can’t be sure how the future will unfold but what we do know is that there will be a greater need for you to take ownership of your own future. In order to help adequately provide for your future in retirement, starting a pension, and reviewing it regularly, is one of the smartest financial decisions you can make. When choosing a pension, having all the information you need is key.
    Sound advice is invaluable, so it’s a good idea to seek advice from a financial advisor like Advice First Financial.
    A trusted financial advisor can guide you through the process and help you select the right pension plan for your circumstances.

    Get Advice

    Talk to us now and make an appointment with one of our Letterkenny team of QFAs.
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    Get in touch here or give us a call at 074 910 3938.

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    Examples of Tax Relief at work

    Tax-saving opportunities for Employees

    If you are an employee who feels you are paying too much tax, the good news is that you may be entitled to a refund of some of the Income Tax you paid in 2022.
    This can be achieved by personally making a lump sum Personal Pension, PRSA, or PRSA AVC contribution, depending on your employment circumstances, by 31 October 2023 (or 15 November 2023 for ROS users) and electing to backdate the tax relief to 2022

    Your pension contributions are subject to age-related limits.

    Age % of Net Relevant Earnings
    Up to age 29 15%
    30-39 20%
    40-49 25%
    50-54 30%
    55-59 35%
    60+ 40%

    Notes:

    1. An earnings cap of €115,000 applies to contributions. Pension contributions made by you in 2022 must be deducted from the maximum tax-allowable contribution calculated based on these limits.
    2. Age is age on your birthday in 2022.
    3. Retirement benefits are subject to separate Revenue limits.
    4. Reference throughout this article to ‘Tax’ refers to ‘Income Tax’.
    Note: If you use the Revenue Online Service (ROS) to both file your tax returns and pay your taxes you have until 15 November 2023 to file and pay for 2022.

    Example: Jane is a 35-year-old employee who paid Income Tax at the 40% rate in 2022. She makes a pension contribution of €10,000 by 31 October 2023 and informs her local tax office by 31 October 2023 that she wishes to backdate relief on this to 2022.
    She is entitled to the following refund.

    40% Tax Payer
    Gross Pension Contribution €10,000
    Tax Refund €4,000
    Net outlay €6,000

     

    Important! Tax refunds are claimed by the individual informing his/her tax district by 31 October 2023 that the tax relief on the contribution paid by this date is to be backdated to 2022.
    Note: If you use the Revenue Online Service (ROS) to both file your tax returns and pay your taxes you have until 15 November 2023 to file and pay for 2022


    What type of pension plan?

    • If you are an employee who is a member of your employer’s occupational pension scheme, you can make additional voluntary contributions (AVCs) to your occupational pension scheme (subject to scheme rules allowing same), to a Group Additional Voluntary Contribution (AVC) arrangement or to a PRSA AVC plan.
    • If you are an employee who is included in a PRSA to which your employer is contributing, you can make employee contributions to that PRSA plan or another PRSA plan of your choice.
    • If you are an employee who is not included in an occupational pension scheme or PRSA to which your employer is contributing, you can make contributions to a Personal Pension plan or a PRSA plan.

    Make the most of the tax efficiency of pension contributions now – you may never get such good value again.

    Tax-saving opportunities for the Self-employed

    Every year thousands of self-employed people across Ireland use their pension as a great way of reducing their tax liability.
    It’s easy, efficient, and if you aren’t doing it, you should ask yourself why not!
    If you are self-employed, you must calculate your tax liability and make a payment by 31 October 2023 (or 15 November 2023 for ROS users) in respect of your:

    • Final Tax Assessment for 2022
    • Preliminary Tax for 2023

    You can reduce your 2022 Final Tax liability and your 2023 Preliminary Tax liability by making contributions to a Personal Pension plan or PRSA and electing to backdate the tax relief to 2022.

    Your pension contributions are subject to age-related limits.

    Age % of Net Relevent Earnings
    Up to age 29 15%
    30-39 20%
    40-49 25%
    50-54 30%
    55-59 35%
    60+ 40%

    Notes:

    1. An earnings cap of €115,000 applies to contributions. Pension contributions made by you in 2022 must be deducted from the maximum tax-allowable contribution calculated based on these limits.
    2. Age is age on your birthday in 2022.
    3. Retirement benefits are subject to separate Revenue limits.
    4. Reference throughout this article to ‘Tax’ refers to ‘Income Tax’.
    Note: If you use the Revenue Online Service (ROS) to both file your tax returns and pay your taxes you have until 15 November 2023 to file and pay for 2022.

    Example:
    John is self-employed, aged 45 years, and his Net Relevant Earnings for 2022 were €80,000.
    He has paid €15,000 Preliminary Tax in 2022 and his total tax bill for 2022 is €22,000. This leaves him owing €7,000 for 2022.
    He does not currently pay pension contributions. The two scenarios below show just how a lump sum pension contribution can save John lots of money.

    2022 Net Relevant Earnings €80,000 and €15,000 Preliminary Tax paid in October 2022

     

    Remember: Making pension contributions can be a very tax-efficient way for you to save for your retirement.

    Scenario 1: No Pension Contribution

    • Balance of tax due from 2022 is €7,000 (i.e. €22,000 less €15,000)
    • Preliminary Tax due for 2023 is €22,000 (i.e. 100% of 2022’s Final Liability)
    • Total payment to Revenue is €29,000

    Or

    Scenario 2: After Pension Contribution

    • Before 31 October 2023, John makes a €20,000 Pension Contribution and backdates the tax relief to 2022
    • The actual Tax Bill for 2022 was reduced to €14,000 i.e. the total Tax Bill for 2022 of €22,000 less tax relief of €8,000 {40% on the pension contribution of €20,000} However, €15,000 Preliminary Tax was paid already in October 2022. Therefore, a refund of €1,000 is due from the Revenue.
    • Preliminary Tax due for 2023 is €14,000 (i.e. 100% of 2022’s final liability).
    • Total payment to Revenue is €13,000

    Make the most of the tax efficiency of pension contributions now – you may never get such good value again

     

    Tax-saving opportunities for Directors

    If you are a Proprietary Director (i.e. a director who owns or controls more than 15% of the shares in your company), you are obliged to file self-assessment tax returns by 31 October 2023 (or 15 November 2023 for ROS users) in respect of last year, even if all of your income is taxed under the PAYE system.
    If your income includes non-PAYE income you must pay any balance of Income Tax, PRSI, and USC outstanding from last year.
    You will also need to consider paying Preliminary Tax for the current year.

     

    You can reduce your 2022 total tax liability and you may even receive a refund from the revenue. This can be achieved by personally making a lump sum pension contribution by 31 October 2023 and also by this date electing to backdate the tax relief to 2022.

    Your pension contributions are subject to age-related limits.

    Age % of Net Relevant Earnings
    Up to age 29 15%
    30-39 20%
    40-49 25%
    50-54 30%
    55-59 35%
    60+ 40%

    Notes:

    1. An earnings cap of €115,000 applies to contributions. Pension contributions made by you in 2022 must be deducted from the maximum tax-allowable contribution calculated based on these limits.
    2. Age is age on your birthday in 2022.
    3. Retirement benefits are subject to separate Revenue limits.
    4. Reference throughout this article to ‘Tax’ refers to ‘Income Tax’.
    Note: If you use the Revenue Online Service (ROS) to both file your tax returns and pay your taxes you have until 15 November 2023 to file and pay for 2022.

    Example:
    Sarah is a proprietary director i.e. a director who owns or controls more than 15% of the shares in her company.
    She paid Income Tax at the 40% rate in 2022. She will make a pension contribution of €20,000 by 31 October 2023, which is within the age-related limits allowed.
    With her return of income for 2022 she informs her local tax office by 31 October 2023 of this payment and of her desire to backdate the tax relief on this to 2022. She is entitled to the following refund:

    40% Tax Payer
    Gross Pension Contribution €20,000
    Tax Refund €8,000
    Net outlay €12,000

    What type of pension plan?

    • If your company contributes to an occupational pension scheme on your behalf, you can make additional voluntary contributions (AVC’s) to your occupational pension scheme (subject to scheme rules allowing same) to a Group Additional Voluntary Contribution (AVC) arrangement or to a PRSA AVC plan in respect of your income from your company.
    • If your company contributes to a PRSA on your behalf, you can make contributions to that PRSA plan or another PRSA plan of your choice with respect of your income from your company.
    • If your company does not contribute to an Occupational Pension arrangement or PRSA on your behalf, you can make contributions to a Personal Pension plan or a PRSA plan in respect of your income from your company.

    Make the most of the tax efficiency of pension contributions now – you may never get such good value again.

    Tax-saving opportunities for Public Servants

    How to calculate the scope for an AVC against the previous year’s income

    A review must take place to determine the scope of the AVC which can be made in terms of obtaining Tax Relief.
    When determining the scope of that Additional Voluntary Contribution, a number of factors come under consideration.

    1: Gross Earnings:
    Gross earnings for a prior year could be confirmed by reviewing the payslip for the last payroll period in the relevant year (see the cumulative table of earnings) or obtaining an Employment Detail Summary from the Revenue website. There is also an overall upper limit on the amount of earnings that may be taken into account for the purposes of giving tax relief. The earnings cap is currently set at €115,000.

    2: Age-Related Limits:
    There is also an age-related percentage limit of an individual’s relevant earnings. The maximum amount of pension contributions for which an individual may claim tax relief may not exceed the relevant age-related percentage of the individual’s earnings in any year of assessment

    Your pension contributions are subject to age-related limits.

    Age % of Net Relevant Earnings
    Up to age 29 15%
    30-39 20%
    40-49 25%
    50-54 30%
    55-59 35%
    60+ 40%

    Notes:

    The age-related percentage applicable is based on the age attained in the year of the income that is being pensioned. So, if you are pensioning the previous year’s income, you need to take into account the age attained in that year

    Remember: If you are looking to make an AVC against 2022’s income the contribution must be paid and filed prior to 31st October 2023 (if filing by post) or by 15 November 2023 (if filing online)


    Existing Contributions:

    The level of contributions already being paid by the scheme member in the given year must be taken into account.
    The standard contribution rate right across the public service is 6.5% of salary made up of 5% for the main pension scheme contribution and 1.5% in respect of spouses and children’s scheme contribution.

    However, it is important to understand that some members may pay more or less than this as there are differing agreements regarding contributions depending on when they commenced work and the sector in which they are employed.
    The actual level of your contributions should be confirmed by reviewing your last payslip for the relevant year which should have a cumulative table of the same or by requesting from your employer or scheme administrator directly.

    It is important to note that the deduction formally known as the Pension Related Deduction (PRD) and now referred to as the Additional Superannuation Contribution (ASC) does not form part of the above age-related limits and can be ignored when determining the scope for an AVC. Finally, where there are contributions being paid towards the Purchase of Notional Service or pre-existing AVC arrangements in 2022, these should also be taken into account when determining the scope for an AVC.

    Example:
    To illustrate the potential scope for an AVC, we have looked at an example below based on a public servant looking to make an AVC against 2022’s income.

    John’s Age: 52
    Gross Earnings in 2022: €55,000
    Existing Contributions in 2022: John joined the public sector scheme in 1997 and his main scheme and spouses and children’s contributions are calculated as follows:

    Main Scheme Contribution 1.5% of Gross Pensionable Remuneration* Plus 3.5% of Net Pensionable Remuneration **
    Spouses & Children’s Scheme Contribution 1.5% of Gross Pensionable Remuneration*

    * Gross Pensionable Remuneration equates to full-time pay plus any approved pensionable allowances. In this case, we have assumed this to be €55,000
    ** NPR is Net Pensionable Remuneration and equates to Gross pensionable remuneration minus two times State Contributory Pension and in this case, we have assumed this to be €29,088 (€55,000 – (€12,956 x 2)

    John is not currently paying any contributions to purchase Notional Service and does not have any pre-existing AVC’s in 2022

     Scope for AVC – John

    Gross Earnings €55,000
    Apply Age Related % of earnings applicable in that year €16,500 (€55,000 X 30%)
    Less Main Scheme Contribution (1.5% of GPR + 3.5% of NPR) -€1,843.08
    Less Spouses and Children’s Contribution (1.5% of GPR) -€825.00
    Less Contributions for Purchase of Notional Service €0.00
    Less Existing Additional Voluntary Contributions €0.00
    Remaining scope for AVC €13,831.92

     

    For those looking to make an AVC against 2022’s income, the contribution must be paid and filed prior to 31st October 2023, if they are filing for relief by post or by 15th November 2023 if they are filing online using Revenue’s My Account.

    Last Minute AVC’s

    Many public servants should and will look to make a last-minute AVC just prior to retirement.
    It is key to understand in these cases that the AVC must also be paid before the employment is terminated, hence the reference to Last Minute AVC’s

    Make the most of the tax efficiency of pension contributions now – you may never get such good value again.

     

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