Recruitment HomepageLibraryUsing Your Pension to Reduce Your Tax Bill

Most countries offer inducements in the form of tax relief to those who make personal provision for their retirement by investing in a pension. No matter what your age, or what stage of your career, investing in a pension is worthwhile. The older you get the more you will concern yourself about a pension and the more expensive it gets because each birthday will reduce your working career by another year.

If you are a contractor then there is more to think about concerning pensions than if you were an employee. In most jobs employees are cosseted by employers and legislation and the only decision they have to make about their pension is Will it be enough? Should I top it up?

A contractor does not have the luxury of an employer or pension trustees to worry about his or her retirement finances. It is very important then that contractors should seriously consider getting some pension cover from an early stage in their careers.

Pensions should be looked on as a means of deferring tax or postponing the payment of income tax until some date in the future usually retirement.

In some jurisdictions there are no upper limits on the proportion of your income which you can divert into a pension fund with the result that wealthy people with their own businesses pay themselves very small salaries and make hefty contributions to a pension scheme to minimise their tax.

As a general rule, the longer you pay into a pension scheme the more it will pay out (unless the fund managers manage to shrink your nest egg). So if you are starting a pension fund late in your career then you had better be prepared to make sizeable contributions or else you will be facing a rather small payout in your retirement.

Remember it's never too late. Even a small pension payout could mean the difference between survival and comfort in your retirement. Pension contributions made at an early stage offer better value than money invested even a few years later. The early pounds grow furthest because of the impact of investment growth.

Most pension packages allow you to invest occasional windfalls so if you have a high income or receive an inheritance from a maiden aunt it could facilitate early retirement.

Key Aspects of Irish Pension Law

As a form of savings, pensions can be very tax efficient for self-employed contractors in particular.

	For those under 30 years, 15pc of income is allowable against tax.
	For those under 40 years, 20pc of income is allowable against tax.
	For those under 50 years, 25pc of income is allowable against tax.
	For those over 50 years 30pc of income is allowed as a deduction against tax

Under recent changes to pension legislation, individuals can take out a PRSA (Personal Retirement Savings Account), allocate a proportion of their income to the PRSA and decide how the money is to be invested. The PRSA continues to build up irrespective of where the person is working.

back