A lot of planning goes into ensuring that you will have a pension that can support you in your retirement. But on top of thinking about the value of your pension, how much needs to go into it, there are tax implications which also need to be considered.
The many different types of pension products, their payments and other benefits, can be subject to different types and levels of tax. There are also tax considerations to payments made into a pension long before you retire.
Table of Content
Income Tax on 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.
Company Pensions
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.
Approved Retirement Funds
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%.
Personal Retirement Savings Accounts
A PRSA, as a self-administered pension scheme, is liable for income tax, PRSI, and USC charges when funds are withdrawn, or imputed distributions are made.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.
State Pensions
Social Welfare pensions from the Department of Social Protection are liable for income tax. However, they 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.
Foreign Pensions
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.
Pensions Exempt from Tax
There are a number of pension payments which are considered to be exempt from taxation. These include:
Avoiding Emergency Tax
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.
Pensioners Living Abroad
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.
Chargeable Excess Tax
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.
Tax-Free Lump Sum in Retirement
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.
Tax-Free Lump Sum Limits
While €200,000 is the maximum possible tax free lump sum which can be claimed, other limits also apply depending on the type of pension product which you are using.
For those with an occupational pension provided by their employer, the tax-free lump sum which they can draw down on retirement is limited to 1.5 times their final annual salary.
In the case of a Personal Retirement Savings Account (PRSA) or Retirement Annuity Contract (RAC) the maximum tax free lump sum which can be drawn on retirement is 25% of the total fund.
Lump Sum Tax Bands
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%.
Pension Tax Relief
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.
Tax Relief Limits
There are strict limits to the amount of income for which you are able to claim tax relief in relation to pension contributions. These are centred around your total income and current age bracket.
There is an overall limit on the amount of earnings which may be taken into account for tax relief in any given year. This is currently set at €115,000. This overall limit applies to a single or multiple sources of income.
If you are making contributions to an occupational pension and a PRSA, then an aggregate limit of €115,000 applies to both.
There is also an age bracket limit on the amount of a person’s earnings for which they may claim tax relief. This limit gets larger the older the employee is.
These percentage limits are:
| Under 30 | 15% |
| 30 – 39 | 20% |
| 40 – 49 | 25% |
| 50 – 54 | 30% |
| 55 – 59 | 35% |
| 60 or Over | 40% |
So if you are 35 years old, and make contributions to your pension which amount to 25% of your annual earnings, only the first 20% is eligible for tax relief.
That person, if they have earnings of €40,000 a year, may only claim tax relief on pension contributions of up to €10,000.
For certain categories of professional sports persons there is a limit of 30% for all those below the age of 50 years old.
Company Pensions
For the majority of PAYE employees on a company pension, any pension contributions and the appropriate tax relief will be applied with your pay. If it is not you can claim that tax relief through the Revenue Service.
If you have a company pension and are also making additional voluntary contributions (AVCs) to a PRSA plan, then the amount of tax relief you are eligible for will be reduced by the employee contributions to the company plan.
There is no relief from PRSI or the USC for employee contributions to an occupational pension.
Ordinary contributions by an employer to an employee’s occupational pension scheme are also generally tax deductible. Special contributions beyond the ordinary annual contributions made by an employer may also be allowed as an expense if they meet certain criteria.
PRSA
For people paying into a PRSA, the amount of eligible tax relief is set according to the age based earnings limits noted above. No relief on PRSI or USC is available for contributions made to PRSAs.
As of 2022, employer contributions to a PRSA plan no longer count towards the employee’s age-related contribution limit.
Retirement Annuity Contracts
An RAC is eligible for tax relief on relevant earnings based on the age rated relief limits, and the upper limit threshold. No relief on PRSI or USC is available for premiums paid to RACs.
Foreign Pension Schemes
Employees of a foreign based company who have been seconded to work in a branch or associated company in Ireland may continue to make contributions to a overseas occupational pension scheme.
Depending on the setup of the pension scheme, and how much time the employee has been seconded to Ireland, they may be able to get income tax relief on their pension contributions.
Pension schemes operated by UK and EU providers for Irish businesses and employees are also classified as ‘overseas pension schemes’. They can qualify for all the associated tax reliefs for occupational pensions, provided they meet the standards.
Tax Treatment on Death
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.
| Inherited By | Income Tax | CAT |
| Spouse | Yes (If not transferred to spouse’s ARF) | No |
| Children aged 21+ | Taxed at 30% flat rate | No |
| Children under 21 | No | Yes. Normal Inheritance rules |
| Others | Yes. Marginal Rate | Yes. Normal Inheritance rules |
In the case of CAT, this only applies to the amount over the threshold of the relevant category of person inheriting the fund.
Leaving a Pension
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.
Buying Property with your Pension
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.
