As Declan McEvoy from ifac outlines this week, being dependant on the State pension in your retirement may leave you in a position where your lifestyle is compromised in later years.

If you have paid Class S PRSI contributions for most of your working life, you will probably be eligible for a State pension (contributory) when you reach age 66. If you have not made sufficient PRSI contributions, you can apply for a State pension (non-contributory), which is means tested.

Investing in a personal pension plan years in advance of retirement makes good financial sense and is a very tax efficient way of providing sufficient income for your future. The earlier you start the better.

Personal pension

Contributions towards a personal pension scheme are fully tax allowable subject to certain limits. These limits are age related. The income ceiling for tax relief on pension contributions is €115,000. Single premium contributions can be made right up to the filing date for your annual tax return which is very beneficial for farmers/self-employed, as it allows at least ten months to consider how much you can or should pay into your pension to minimise your tax liability.


Joe is a 42-year-old dairy farmer and earns an annual income of €40,000. The maximum Joe can contribute to his pension is 25% which is €10,000. This will allow Joe get tax relief on annual contributions up to €10,000. If Joe was earning €120,000, as the maximum amount allowable for tax relief is €115,000, his tax relief would be €28,750 (25% of €115,000) not €30,000 (25% of €120,000).

Tax advantages to investing in a personal pension fund

You can avail of tax relief on your contributions at your marginal rate of tax. You can also avail of 25% of your pension fund on retirement as a tax free lump sum up to a limit of €200,000. If your 25% is greater than €200,000, you will pay income tax at 20% up to €300,000. Above that amount income tax is payable at your marginal rate.

Your options at retirement:

  • Take a tax-free lump sum up to 25% of pension fund.
  • Receive a pension (annuity) on the remainder of the fund taxable at your marginal rate.
  • Transfer some or all of the fund to an Approved Retirement Fund (ARF) or Approved Minimum Retirement Fund (AMRF). You can withdraw monies at any time from an ARF subject to normal income tax. With an AMRF you cannot reduce the fund below €63,500 limit before age 75.
  • You should always take professional advice before making these decisions.

    Fees and charges on personal pension funds

    Pension arrangements are financial services products, and will always be subject to charges. Fees and charges can have a significant impact on the value of the pension fund over time. The type of fees/charges applicable can be entry fees, transfer in fees, annual management charges, or switching charges. It is important to understand these fees and charges and who is paying them.

    How much will I need in retirement?

    Most experts would say that about 50% of your current earnings may be sufficient as a gross retirement income. So if you currently earn €60,000, you need a pension income of €30,000. If you are eligible to avail of the maximum state pension of €12,900, you will need another €17,100 to supplement your income annually. A large enough pension pot will be required to support an income of €17,000 annually.

    A simple example

    If Joe decides to start a personal pension at age 40, with the intention to retire at age 66, to ensure he can avail of €1500 per month supplementary income from his personal pension, he will need to save circa €570 per month. This contribution could be as little as €342 per month if Joe is eligible for tax relief at 40%, which amounts to €4104 annually. Joe needs to be sure to get professional advice before deciding on his personal pension options.

    When should I start a personal pension?

    The earlier you start to contribute to your pension the better for you. Every 10 years that you delay saving means you double the cost of how much you need to contribute, to get the same income when you retire. There is a big difference between starting at age 26 and starting at age 46.

    Different types of pension pots

    There are lots of different types of pension funds to invest in with varying returns. A typical pension managed fund would contain a spread of equities (usually between 50% and 70%), with the remainder in assets such as bonds, cash and property, which are considered lower-risk assets.

    A personal pension is one of the most tax efficient ways of saving for your retirement.

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