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Pensions are a year-round tax-saving and retirement-funding solution.
While there is always a tendency to focus on the most imminent deadline, it serves as an opportune time for everyone – irrespective of employment type – to avoid sleepwalking into retirement and review their plans to ensure they are on track for the type of lifestyle to which they aspire in retirement.
With the ongoing increases in life expectancy, this continues to take on added significance (coupled with ongoing question marks) over State pensions (the amount of entitlement and qualifying age in danger of being reduced and pushed out, respectively).
With up to 40% tax relief available on contributions, combined with generous percentage amounts of income that can be paid into a pension, this represents a massive opportunity for individuals to tax-efficiently save for their retirement.
So, what are the significant dates?
At present, accountants and their self-employed clients are finalising tax bills for 2020 and preliminary tax bills for 2021. This must be done by 31 October if it is a manual return, or 17 November if via Revenue Online Service. Many returns are now done online.
Who does this affect?
Self-employed and sole traders.
What happens next?
One’s accountant finalises figures for 2020, which lead into 2021. One must pay their final tax bill for 2020 and their preliminary tax bill for 2021. This has an added significance as your preliminary tax bill for 2021 is based on your final tax bill for 2020.
How can I reduce my tax liability?
You can make a lump sum pension contribution before 31 October (if making a manual return) or 17 November (if online). Going forward, you might elect to pay a monthly direct debit in order to prepare for the following year. This may make sense from a cashflow point of view, and you can always combine it with a lump sum top up.
It also means that you are going into the market to purchase units in your pension fund twelve times a year, instead of via a once off lump sum. The multiple payments can be beneficial as putting one lump sum into your pension on a particular day can run the risk of unit prices being at an expensive level.
Example:
Mary is a self-employed farmer. Her final tax bill for 2020 is €20,000. She pays €10,000 to her pension and this, in turn, reduces her tax bill for 2020 by €4,000 (40% of €10,000) and because her final tax bill, now revised down to €16,000 (€20,000 minus €4,000), has been reduced, this also reduces her 2021 preliminary tax bill by €4,000.
If she settles with the Revenue for €20,000, then she has cleared her liability but won’t see those funds again. By investing in her pension, she will see the money invested in the pension plus any growth when she retires*.
What if I’m not self-employed?
Whether you are a PAYE worker in pensionable employment, a PAYE worker in non-pensionable employment or a company director, now is a good time to review your retirement plan to ensure you are on track as well as availing of up to 40%** tax relief on contributions.
Who should I speak with?
Ideally, you should speak to a broker, as brokers have agencies with multiple life and pensions companies and can offer choice on product provider/fees and charges, as well as fund manager. Banks tend to be tied agents and so can only offer the option of one provider.
Ideally, look for a Certified Financial Planner (CFP) operating in your area via www.fpsb.ie/find-a-cfp/. The CFP is the leading globally recognised benchmark qualification for financial planning professionals.
*Pension returns (growth) are not guaranteed, and your capital may be at risk.
**Tax relief on personal contributions are at 20% or 40% depending on net relevant earnings.
Barry John is managing director of BJR Financial Planning and is a qualified financial adviser and certified financial planner based in Mallow, Co Cork. He can be contacted on barryjohn@bjrfinancial.ie or on 086-7851 511.
Bells Cross Capital Limited t/a BARRY-JOHN RYAN FINANCIAL PLANNING is registered in the Republic of Ireland, registration number 656922 at Bells Cross, Mallow, Co Cork. Bells Cross Capital Limited t/a BARRY-JOHN RYAN FINANCIAL PLANNING is regulated by the Central Bank of Ireland.
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