There is a lot of coverage in the media about pensions but what are the advantages of contributing to a pension plan? Here are 5 good reasons to make pension contributions:
Contributions to your pension are tax-deductible at your marginal rate. By way of example, let’s say you are in the 40% income tax bracket and you make a contribution to an approved pension scheme of €1,000:
|Income Tax Rate||
|Actual Cost to you||
In this example, the full €1,000 is invested in your pension pot, but the investment has only actually cost you €600.
The money in your pension plan can currently grow tax-free, giving it the potential to grow faster than other types of savings and investment plans that are subject to tax.
Under current legislation, you can take part of your pension fund as a tax-free lump sum (subject to a lifetime limit of €200,000). This can enable you to do those things you’ve always promised yourself.
Healthier lifestyles and medical advances mean people are living longer these days. A longer retirement means you’ll need to build a bigger pension fund.
At €12,911 per year, the State pension may not be sufficient to fund your lifestyle. The future of State Pension and age of eligibility is also uncertain. It is therefore important to have additional income to supplement the State Pension when you retire to meet your retirement needs.
The sooner you start the better as you will be able to spread contributions over a longer period and the fund will have more time to grow. The longer you wait before starting your plan, the larger the payments you’ll need to pay to build a meaningful fund.
That said, even if you’re approaching retirement, it is still worth paying money into a pension plan as the Revenue make an immediate contribution of up to 40% and you can access up to 25% of the fund by way of a tax-free lump sum when you do choose to retire.
Having built up a good pension fund will give you the option for early retirement if that is what you wish to do.
November is always the busiest time of the year for pension providers as many people rush to make contributions to new or existing plans. This is because all Pay & File returns for self-assessment income tax customers have to be submitted at this time. Due to COVID-19, where the 2019 tax returns are filed through the Revenue Online Service (ROS) an extension of the Pay & File deadline from 12th November 2020 to 10th December 2020 is allowed. Pension contributions made before this deadline can be offset against the 2019 tax liability.
At McGuire Liston, we will be delighted to provide further information on any aspect of pension planning.
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