When it comes to saving money on your income tax bill, there is no better way than to put money away in your pension. Contributions to a personal pension are tax free, up to certain limits, depending on your age.

Putting as much as possible into a pension plan will ensure an income in your later years which will enable a much more comfortable retirement than would otherwise be the case.

Research from Teagasc showed that in 2023, only 45% of workers in the agriculture, forestry, and fishing sector had supplementary pension coverage, compared to 88% in the financial services sector.

This low uptake is further exacerbated by the lack of contributory state pension coverage among farmers, who for various reasons including late inheritance of the farm, have gaps in their PRSI contributions. This means that many farmers continue to work well passed the normal retirement age because they cannot afford to retire.

This situation is very common, and has proven to be a major roadblock for generational renewal.

Varies

Perhaps unsurprisingly, private pension coverage among farmers also varies greatly depending on the farm system.

A Department of Agriculture study found that 70% of dairy and tillage farmers have coverage while only around 40% of beef and sheep farmers have a private pension plan in place.

Self-employed people generally opt for a Personal Retirement Savings Plan (PRSA) which gives someone flexibility to save for retirement at their own pace.

A PRSA will allow for varied annual contributions, something which is useful for farmers as incomes can vary significantly from year to year. The general rule with private pensions is that the younger someone is when they start paying in, the greater the amount of money they will have for an income on retirement.

For example, investing €10,000 per year in a pension from the age of 25 would give a pension pot of around €600,000 by the time that person reached 65.

If they were to wait to start contributing until they turned 35, then the pension pot would be reduced by a third, to around €400,000 – assuming 4% compounded investment growth across the lifetime of the plan.

In reality, younger people tend not to concentrate very much on their pension plans at the stage in life when they are probably earning less, and more concerned about saving for a deposit for a house than they are about their pension.

The legislation around caps on tax-free payments into pensions does recognise this reality.

The amount of income that can be allocated to pension contributions rises from 15% for those under the age of 30 to a maximum of 40% for those over 60 (see Figure 1).

There is also an overall income cap in place for the amount that can be claimed. This cap, at €115,000, means that the maximum tax-free contribution is also based on a salary of that amount.

For example, a 52-year-old with a salary of €150,000 can contribute 30% of their income to their pension, which would be €45,000. However, the salary cap will also come into play, so their tax-free contributions are actually limited at 30% of €115,000, which is €34,500.

Stopping

There is nothing stopping anyone from contributing more to their pension, but this can only be done out of after-tax income, which removes most of the benefit.

Many private pension plans allow for tax-free lump sums to be withdrawn on retirement. There is a lifetime tax-free allowance of €200,000 for such withdrawals.

Taking a lump sum from your pension at retirement will obviously reduce the weekly or monthly retirement payment, but it can be a useful option where there are debts to pay off or there are plans for a change of lifestyle on retirement.

While the State pension would generally not be enough to maintain a comfortable retirement, it is important to make sure you maintain your PRSI contributions throughout your working life.

The State contributory pension, which is not means tested, is shifting towards a “total contributions approach” where someone will need at least 10 years of PRSI contributions to qualify for a State contributory pension.

Worth

To qualify for the full contributory pension, currently worth €299.30 per week, you will need 40 years of PRSI contributions. The shift to this total contributions approach is being phased in between now and 2034.

Ireland’s auto-enrolment pension scheme, called MyFutureFund, came into force on 1 January this year.

The scheme sees employees and employers contribute to a pension fund for the employee, and the State adds a small top-up.

The rate of contributions for the first three years of the scheme are 1.5% of gross pay for both employee and employer, with the State adding a further 1%.

The level of contributions rises to 6% of gross pay for both employer and employee and 2% by the State after year 10 of the scheme.

Every employee aged between 23 and 60 earning more than €20,000 and not in a suitable private pension scheme should be enrolled in MyFutureFund by now. Contributions have a salary cap of €80,000.

The plan is not open to self-employed workers but farmers who have incorporated their business and those who have employees will be familiar with the contributions.