The single most tax efficient way of saving for the future is to have a pension plan in place. Contributions to a pension are tax free, up to certain limits depending on your age, and as they are amassed across your working life, they can build towards a comfortable post-retirement income.

While the best time to start contributing towards your pension is from as young an age as possible, if you haven’t already got one in place, then the second-best time to start contributing is now.

While it might be hard to convince someone in their early 20s to think about putting money aside for their retirement, the difference in the amount that has to be contributed regularly if you start young is huge.

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If a 25-year-old was to put €400/month of their pre-tax income into a pension plan, then they would build a pension pot that would be worth more than €250,000 on retirement. If you were to start pension saving at 45, contributions would need to be almost €900/month in order to have the same size pool of money to draw on at retirement.

Many farmers have an off-farm job, with many employers offering access to company pension plans as part of their terms of employment. In some cases, the employer will also add to the employee contributions to their pension plan. It is important to note that if you leave a job within two years of starting the position, the employer is entitled to claw back the contributions they made on your behalf to the plan.

There are limits to the amount which can be contributed tax-free to a pension plan which is based on your age and your income, and is also subject to an annual cap. If you are under 30, the maximum is 15% of your annual income, with the cap rising in five percentage point jumps until it hits 40% for those between 60 and 65 (see Figure 1).

There is an annual income threshold set at €115,000 for contributions and a lifetime income threshold set at €2m, but this is set to increase to €2.8m by 2029. It is possible to make pension contributions beyond these limits, but those will come from after-tax income.

As pensions are taxable income when they are drawn down, there is a change that you might end up paying tax twice on the same income if you make contributions in excess of the tax-free limits.

For farmers who have their business incorporated, there are opportunities to make larger tax-free payments into a pension plan known as a personal retirement savings account (PRSA), and while the rules around these plans have changed several times in recent years, it remains possible to contribute up to 100% of a director’s salary tax-free to one of these plans.

As with all financial plans, it is critical to talk to a qualified financial adviser before making any pension decisions.

Auto-enrolment

The long-delayed pension auto-enrolment scheme for all employees comes into place from 1 January next year. From that date, all employees of a company will have to be automatically enrolled in a pension scheme.

If you are a farmer who has incorporated their business, and are the only employee of the company, you will have to have a pension plan in place. If you have employees, then you will need to get them signed up for a pension.

If employees already have a pension plan, then there is no need to worry about the auto-enrolment scheme as it is targeted at earners without a plan.

The contributions start small in the first year, but ramp up fairly quickly (see Table 1). They cover all employees between 23 and 60 years old earning more than €20,000 across all incomes and who are not currently part of a pension plan.

This means that an employer will be making an annual contribution of €1,200/year for every €20,000 earned by an employee by year 10 of the scheme.

Once again, if you are a farmer who employs on-farm labour, it is very important to talk to your financial adviser to ensure that you are ready to comply with the new rules.

State pension

Whether you have a private pension or not, you will qualify for the State pension when you turn 66 – the current earliest age it can be drawn down from. Recent changes introduced by the Government mean you can delay the start of the drawdown of your State pension until you turn 70. By delaying the drawdown, an increased weekly payment can be achieved.

There are two types of State pension, the contributory and the non-contributory. The non-contributory pension is means tested and is currently worth €278/week for those aged 66-80 and €288/week for those over 80.

The contributory pension is mostly based on your lifetime PRSI contributions. In order to qualify for the maximum State contributory pension, you will need 2,080 full-rate PRSI contributions in your lifetime, which works out as 40 years of PRSI contributions. The minimum required to receive any non-contributory pension is 520 PRSI contributions.

The contributory pension is not means tested.

Whichever State pension a person qualifies for, it is clear that the income in retirement would be modest, once again underlining the need have a private pension plan in place in order to help with a comfortable retirement.