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12 Oct, 2020

Pensions – More than just an Income Tax break?

The tax return deadline for the self-employed is approaching fast. And if history repeats itself, these next few weeks will see a marked increase in the number of farmers lodging cheques into their pension accounts.

The tax return deadline for the self-employed is approaching fast. And if history repeats itself, these next few weeks will see a marked increase in the number of farmers lodging cheques into their pension accounts.

The main driver for this is the income tax relief achieved on these contributions. And that is no surprise. A pension contribution that gets 20% income tax relief is equivalent to the old SSIA (i.e. adding 25% to an SSIA contribution, is the same as a 20% tax reduction on a pension contribution). If the SSIA was a good idea, then the Standard Rate tax relief on a pension is a good idea.

If some of or all your pension contribution benefits from the 40% tax rate, well that is a great idea. A no brainer really. But what sometimes gets lost in the rush before the deadline, are the many other fantastic benefits from contributing to your pension plan.

Income in Retirement

Pension plans are savings vehicles. During our working life we use them to store some of our earnings, which we will then use when we are no longer working. For most people, the idea of living solely on the state pension, is not ideal. So, building a fund that will subsidise the state pension, and maintain our lifestyles, makes huge sense.

Tax Free Growth

It is believed that Albert Einstein said that “compound interest is the eight wonder of the world”. And he is right, getting growth on your growth is a wonderful thing. A pension account allows you to accumulate assets and deposits, but without the eroding effects of Capital Gains Tax or DIRT.

Tax Free Lump Sum

When you are retiring, you have the option to take a portion of your fund as a tax-free lump sum. For sole traders this is to a maximum of 25% of the fund. For those with an occupation pension, they can take 25% of the fund OR an amount equal to 1½ times their final salary. In some cases, this could mean getting 100% of your fund as a tax-free lump sum.

Tax-Free Payment on Death

In the event of a death, monies held in Personal Pension, Retirement Bonds and PRSA accounts are paid to the estate without the deduction of tax. For active members of an occupational pension scheme, a lump sum of 4 times salary, plus the employee’s own contributions, are paid to the beneficiaries. Any balance in funds is used to purchase an annuity for dependents.

Succession Planning Tool

Most farmers see themselves as custodians of their land. Some or all the land was passed to them and they intend to do the same. Ifac’s 2020 Irish Farm Report however, highlighted that 84% of farmers have no definite succession plan in place. Deciding the who, when and how is difficult. But one thing we firmly believe, is that making these tough decisions will be a lot easier if farmers have financial security and a guaranteed income for life. A pension plan can provide this.

If you want to know more about the benefits described here and how they apply to your pension plans, please contact your local ifac office.

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