Starting a Self Employed Pension: 7 Reasons it’s a no-brainer

Being self-employed, you are putting your blood, sweat, and tears into making your business successful.

It can be difficult to juggle everything while also considering planning financially for the future.

Only 6 in 10 people in Ireland have a private pension, according to the Central Statistics Office (CSO). The CSO’s findings were worrying, with 37% of respondents claiming they had never gotten around to establishing a pension.

The State pension is paid to anybody who has earned contributions under a qualifying contribution-based scheme. Self-employed individuals and company directors are two examples of people who will be receiving the benefit. As a result, we can suppose that the remaining 40% of the population intends to rely on the €248 per week State pension.

Do you feel comfortable that €248 a week is enough to live on?With no guaranteed the state pension will be what it is in 20 years time, as it is under huge financial pressure to sustain current levels. UK Pension benefits for example are far less generous that Ireland.

Why start a pension?

Thankfully, because of better diets and medical breakthroughs, people are living much longer these days. As a result, we’re working longer, living longer, and spending for longer. To ensure that your money lasts, you’ll need to plan ahead.

The government does not want everyone to depend on living solely off the State pension, nor can it fund you beyond current levels. Some of the benefits of contributing to a pension are:

1)The taxman will give you a helping hand

For every euro you pay into your plan, the taxman will currently give you 20 cents back, so it only costs you 80 cents.

If you’re a higher rate taxpayer, it’s an even better deal! You’ll currently get 40 cents back, so each euro you pay into your plan will only cost you 60 cents. These amounts are based on income tax rates of 20% and 40%.

2)Your payments can grow tax-free

The money in your pension plan can currently grow tax-free – so it should have the potential to grow faster than in other types of savings plans that are subject to tax.

3)Delay costs money

Providing yourself with the retirement income you’ll need means building up money in your pension fund. But, the longer you wait before starting your plan, the larger the payments you’ll need to pay. Compounding money is amazing!

4)Potentially benefit from the ‘downs’ as well as the ‘ups’

Your regular contributions can benefit from periods of stockmarket volatility – particularly in the early years. When investment values are low, you can buy more units with your contribution than you could have when unit prices were higher. If the market subsequently recovers, then all these units can benefit from this recovery – making stockmarket volatility work in your favour.

5)How else can you provide for your old age?

Any money paid into a pension plan may be eligible for tax relief. No other form of saving qualifies for this benefit. A pension plan really is the most tax efficient way to save for your old age.

There are very few reliefs left for private employees!

6)It’s never too late

Even if you’re approaching retirement, it may still be worth paying money into a pension plan, as you’ll be setting aside something for the future.

You may have your mortgage clear and you could recycle this money into tax free growth that attracts tax relief@up to 40%

7)You can draw a tax-free cash sum at retirement

When you retire, you can currently take 25% of your pension fund as a tax-free lump sum (subject to a lifetime limit of €200,000). This can enable you to do those things you’ve always promised yourself. Thing of a roadtrip you never go to in your 20’s, helping your children get on the property ladder etc.

FAQs about pension contributions:

Q: I’m self-employed. How much can a pension contribution reduce my tax bill by?

A: If you are self-employed and you make a €10,000 pension contribution, and pay tax at 40 per cent, you will reduce your tax bill by €4,000.

Q: Is there a limit to how much of my earnings I can contribute and for which I can claim tax relief?

A: Yes. For pension contributions by individuals, whether they are self-employed or members of company pension schemes, age-related contribution limits apply.

Q: What if I am an employee in a company pension scheme?

A: The same limits apply. You can make personal contributions to it but it’s worth noting that if you are in a company pension scheme, these limits apply to your employee’s contributions and Additional Voluntary Contributions (AVCs). Any contributions by the employer can be paid in addition to these employee limits.

Q: So, what is an AVC?

A: AVCs are Additional Voluntary Contributions to a company pension scheme that are over and above the amount an employee is required to contribute under the scheme rules.

AVCs qualify for tax relief at your marginal rate, so if you pay tax at the 40 per cent rate then that’s the tax relief.

Q: Why should I consider making an AVC?

A: If you’re a member of a company pension scheme, you can make additional voluntary contributions to increase the size of your pension pot at retirement.

Q: What about self-employed people?

A: A lot of self-employed people will be making a pension contribution as a lump sum single contribution now, with tax relief backdated to the previous tax year.

If you are self-employed, and you have paid a certain amount of tax for 2021, you can do it as part of your tax return, to help reduce the amount of tax you pay for 2022. Such contributions are normally paid into a Personal Pension or a Personal Retirement Savings Account (PRSA).

Q: Are there any additional incentives for the self-employed?

A: The good thing about pension contributions for self-employed people is that you can reduce your tax bill for the previous year, and in doing so also reduce the preliminary tax for the current year. If the actual tax bill you have for 2021 is reduced, your preliminary tax bill for 2022 is also reduced, so that’s a double benefit when you are starting a pension.

Q: When should I make a lump sum contribution?

A: Any lump sum contribution (Self Employed or AVC) must be made before the tax deadline – and the election to backdate the tax relief to the previous tax year must also be made before the tax deadline.

Q: Are pension funds hit with capital gains tax?

A: No, the investment growth by the pension fund is not subject to tax (on the investment income or capital gains earned by the pension fund). However, income tax may be levied on pension benefits taken during retirement.

Q: On retirement, how much of my pension will I receive tax free?

A: For self-employed people or those in non-pensionable employment, if they have a Personal Pension or PRSA, they can take 25 per cent of the accumulated fund tax free. A similar option of 25 per cent is available for members of Defined Contribution Company Pension Schemes (together with an alternative option based on salary and service).

Q: What if I’ve a variety of pension pots?

A: That €200,000 is a lifetime cap for your retirement lump sum. If you’ve got different pots, it’s cumulative. We also support all of our clients to recover and consolidate all their previous pensions from past employers.

Getting started

If you’re looking to start a self-employed pension and want to ensure you’re on track for a comfortable retirement, Gallivan Financial can help. We have over 33 years experience in helping people plan for their golden years, and we’ll work with you to create a holistic retirement plan that takes into account all your unique circumstances.

Contact us today via the chat box on social media or email

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