Maximum Pension Contributions.

A pension contribution is a payment that is made into a pension fund by an employee and normally taken at source from their salary or wage.

Each salary period a percentage of your salary is invested in a pension fund which accumulates over the years of your working life to result in a sum of money that will pay you a pension each month in retirement.

The value of each contribution and the way in which it is invested will add up to whether you have a strong enough pension plan.

Pension contributions are supported by the government, meaning that they are subject to tax relief. This tax relief differs depending on your rate of income tax.

Higher rate: Every €100 invested only costs €60 in reality (free €40 from the government)

Standard rate: Every €100 invested only costs €80 in reality (free €20 from the government)

Pension contribution limits are set by age in order to reflect the number of years left in a person’s working life and to give them the best opportunity to reach a healthy pension pot amount.

At the age of 30, for example, there is a limit of 15% of total pay that can be put into a pension. This then rises by groups of years until you reach the age of 60+ when the percentage value of salary that you can put into your pension is at its peak, this is currently 40%.

Note: These are personal contribution limits, your employer contributions separate. So if you are 35 and you earn €50,000 per year, you can contribute 20% personally, i.e. €10,000. Your employer may match a certain % of your contribution on top of this.

The amount your employer can contribute is based on your age and which pension product you are using. For example, business owners using PRSAs typically have no company contribution limit. Making them highly tax-efficient ways of withdrawing cash from your business.

Note: The maximum contribution thresholds are also subject to a salary cap. The maximum allowable salary for contributions is €115,000 per annum.

Contributions can be made by employees alone or by both employees and employers. Very often if a pension is set up by a company and offered to its employees, the company will also make a matching payment into the employees fund.

This is tax relief for both the employee and the employer and is seen as an incentive to encourage the employee to save but also to remain loyal to the company.

It is also possible to take out a private pension scheme that is not related to the company you work with.

In this case you will make contributions solely by yourself. You can have more than one pension arrangement.

A pension contribution is normally expressed as a percentage of your salary. This means that as your salary increases due to promotion or taking on additional work, the percentage remains the same but the actual amount of each contribution increases in value.

There is a set minimum and maximum percentage that you will be expected to pay into your pension. The actual amount will be set by the rules of your pension but in general the maximum contribution amount paid by both parties will be 8% of your salary. Your company should make a contribution that represents a minimum of 3% of your salary and the employee makes the rest. This is tax deductible for them and so is beneficial to both parties.

An ordinary contribution refers to the normal payment that an employee and employer might make to a pension fund. It should be deducted from Gross Pay when calculating their tax.

If an employee wants to make a once-off contribution to their pension over and above an ordinary contribution then tax credits are available to help facilitate this in the favour of the employer.

If an employee is a member of an occupational pension scheme they may choose to make Additional Voluntary Contributions from their pay – in effect pay more than the ordinary contribution. 

AVC’s are essential for hitting your maximum allowable threshold. The ordinary contribution when you join the company is never going to be overly material relative to the limit, so there needs to be a conscious review as to how much the employee wants to put in. This should occur immediately following your letter of engagement.

This will allow you to maximise the amount of tax relief you receive from the government.

A Personal Retirement Savings Account is a special investment account that you can use to save for your retirement fund.

The contributions made into it are invested in various funds depending on the risk level you wish to take on.

You can make regular payments or lump-sum payments, both of which are tax deductible. A Personal Pension is a private pension that is organised by self-employed or employed people who do not have an occupational pension scheme.

A PRSA is available regardless of whether your job is full or part-time. They are flexible and you can increase or decrease your contributions at any time. They are also portable, meaning that you can change jobs and the PRSA is not affected.

Generally, people start drawing down income from a PRSA between the ages of 60 and 75. If you retire earlier you may be able to access funds from the age of 50 or if you experience disability or long-term illness.

A PRSA like all pension products, offers tax relief on contributions. As it is personal to you, the level of contribution is regulated according to your personal situation. Thresholds exist for the amount of tax relief at different stages of your life. You will receive income tax relief up to the thresholds outlined earlier and your rebate amounts will be as outlined below. 

It is worthwhile to note that pension contributions are still liable to USC and employee PRSI.

The table above illustrates the amount the government will subsidise into your pension.

However there are 2 other important forms of tax relief to consider:

Tax relief within the fund

Typically, any profits from investments are taxed. This usually takes the form of DIRT tax on interest payments or capital gains on the sale of stocks & shares. While your money is invested within a pension fund, it is exempt from all of these taxes.

Tax-free lump sums

In Ireland once you turn 50 years old, you have the opportunity to take a one-time payment of up to 25% of the total balance of your pension. This is a tax-free lump sum.