Pension Tax Guide: Understanding Tax at Retirement.

Like any other form of income, a pension is taxable, and will likely be liable for income tax, PRSI, or the Universal Social Charge. In most instances the pension provider will deduct the relevant tax from each payment.

The tax on a person’s pension will be taken in the same manner as their job’s income was before retirement. People over the age of 66 are not liable for PRSI but will still have to pay income tax.

Occupational Pensions with your employers have a relatively simple income tax setup, with it all being handled under the PAYE system. The tax due on your pension will be deducted automatically at the time of payment by the person or entity responsible for paying it.

Company pensions do have to pay USC, but are not liable for PRSI charges.

After taking a lump sum from a wide range of pension options, people have the option of reinvesting the remainder of the pension value into an Approved Retirement Fund (ARF). This is a highly flexible type of pension investment, which has the potential to provide additional income post-retirement.

Income and other gains made from an ARF investments are exempt from tax as long as they remain within the fund. Withdrawals from an ARF are treated as income, and are taxable under the PAYE system.

When you reach a certain age, or the fund hits a value of €2 million or more, it is subject to imputed distributions. These are mandatory payments subject to income tax, PRSI and USC.

Imputed distribution comes into effect at age 61, and requires a mandatory withdrawal of at least 4% per annum. When the pensioner reaches age 71, this rises to 5% a year. If the value of the fund rises to over €2 million at any point, the imputed distribution increases to 6%.

A PRSA, as a self-administered pension scheme, is liable for income tax, PRSI, and USC charges when funds are withdrawn, or imputed distributions are made.

Withdrawals from a PRSA are taxable at the pension holder’s marginal rate after the taking of the tax-free lump sum.

Transfers from a PRSA to an Approved Retirement Fund or into another PRSA are not treated as taxable withdrawals.

Imputed distributions for a PRSA come into effect when it is deemed ‘vested’. This is when the pension’s assets become available to the owner.

When the value of the fund is less than €2 million, this means a mandatory withdrawal of 4% of the fund if you are not over 70, increasing to 5% when a person is 71 or older.

If the value of the PRSA exceeds €2 million in total, there is a mandatory 6% imputed distribution which is subject to tax.

The state pension (from the Department of Social Protection) is liable for income tax. However, the state pension are exempt from both PRSI and the USC.

The required income tax is not deducted from your pension payments when they are made, but must be paid at a later date or deducted from other benefits.

Self-employed people must include the pension in an income tax return, and pay its tax alongside any other annual income tax payments.

For people who have other employment income or an occupational pension, the tax for the state pension is handled through the PAYE system. Their tax credits and tax band will be adjusted to account for the amount of tax which is owed on the pension.

Many people who are receiving a state pension, contributory or non-contributory, will not be liable for any income tax, as their income is below the threshold.

If you have a pension from another country, but are resident in Ireland, how tax is paid on that pension will vary based on whether Ireland has a double taxation agreement with the country in question.

The circumstances can still then be different depending on the nature of that agreement, and whether a person is in private or public employment.

There are a number of pension payments which are considered to be exempt from taxation. These include:

Whether you have a pension with your former employer, through a third party pension company, or from a deceased partner’s provider, you may end up subject to Emergency Tax when it becomes a source of income.

In order to avoid this, you should register your pension with the Revenue Commissioners. For this the pension provider’s Tax Registration Number (TRN), the start date of the pension, and the frequency of the payments will be required.

The pension provider will also need your PPSN in order to request a Revenue Payroll Notification. With this they can then calculate how much tax you should be paying on your pension.

A pensioner who is living outside of Ireland in retirement is still liable for income tax here on an occupational pension in almost all circumstances. 

Some exemptions may be granted depending on if they meet relevant criteria on the amount of time spent working outside the state prior to retirement.

The expat’s tax status may also be affected if Ireland has a Double Taxation agreement with the country in question. Some benefits or allowances may also apply if the person can show they are living abroad for reasons of their own health, or the health of a family member.

If the value of a pension fund exceeds the Standard Fund Threshold (SFT) at the time of retirement, it is liable for tax at the marginal rate. The current SFT in Ireland is €2 million, so anything over that is liable for 40% tax.

The tax of 20% paid on any lump sum of between €200,000 – €500,000 may be set against the chargeable excess tax.

When you claim your pension it is almost always possible to take some portion of the overall fund as a lump sum. A good chunk of this lump sum can also be claimed tax-free.

The maximum tax-free lump sum threshold is €200,000. Anything beyond that which you receive as a lump sum is referred to as an excess lump sum, and is liable for tax.

The amount between €200,000 and 25% of the current Standard Fund Threshold (SFT) is taxed at the standard rate of income tax. The SFT is currently set at €2 million, so 25% of that is €500,000.

The €300,000 between €200,000 – €500,000 is therefore taxed at a rate of 20%. Any lump sum amount beyond that is liable for tax at the higher rate of 40%.

Employees in Ireland are entitled to income tax relief on contributions made to a pension scheme each year, whether it is an occupation scheme set up with their employer, or a self-administered pension.

Income tax relief is provided at a person’s marginal tax rate. For a standard rate payer this will be 20%, or if you are paying tax at the top rate, relief will be provided at 40%. 

That means if you contribute €500 to a pension scheme, you would be entitled to either €100 or €200 worth of tax relief, depending on your tax band.

Depending on the type of pension product which you have, there may be a considerable amount left in the fund at the time of your death, which can have considerable tax implications for your beneficiaries.

If you have money remaining in an ARF or PRSA fund, then they could be subject to Capital Acquisitions Tax (CAT) or Income Tax depending on who is inheriting the remaining funds.

In the case of CAT, this only applies to the amount over the threshold of the relevant category of person inheriting the fund.

If you are leaving a pension scheme, either transferring employment or shifting to self-employment, you may be eligible for a refund of pension contributions made so far. The rules on this will depend on the type of pension you have and your employment circumstances.

The gross amount being refunded is liable for income tax at the standard rate of 20%. If the refund is transferred to a PRSA, there is no tax charge.

This tax also does not apply if you were working abroad for the majority of time while a member of this pension scheme.

Self-administered pension funds in Ireland can be used to purchase property as an investment, either before or after you are retired.

Rental income from the purchased property must be reinvested in the pension fund. Importantly, that revenue is completely exempt from income tax. If and when the property is sold there is also no Capital Gains Tax.

The property can only be purchased as an investment, not for the owner to live in. It also cannot be let to family members of the owner.

If someone has an occupational pension with your employer and is considering this as a long term investment, then they must first set up an approved scheme, such as a PRSA or Approved Retirement Fund, and transfer the funds to it.