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The Benefits of Employer Pension Contributions

 

Pensions play a vital role in helping individuals secure their financial future, especially in retirement. While personal contributions are essential, the role of employers in providing pension schemes should not be overlooked. In this post, we will explore the benefits of employer pension contributions and why they are crucial for employees and employers.

 

 

Increased Retirement Savings

Employer pension contributions serve as an additional source of funding for employees’ retirement savings. By contributing to an employee’s pension plan, employers help employees build a more substantial retirement fund over time. This extra boost can make a significant difference in the overall amount employees can accumulate before they reach retirement age, providing them with a more stable and comfortable financial future.

 

 

Tax treatment of employer pension contributions

 

One significant advantage of employer pension contributions is the tax benefits they offer to both employers and employees. In Ireland, employer contributions to pension schemes are tax-deductible for corporation tax relief, helping to reduce the overall tax liability for the employer. 

 

For employees, any employer contributions made to their pension are not considered part of their taxable income, effectively reducing their tax obligations. These tax advantages make employer contributions an attractive option for both parties!

 

Let’s look at an illustration below…

 

 

Profile:

 

Marie is age 45.

Annual salary: €45,000

Pension tax relief (based on age and earnings): 25%

Maximum allowable annual contribution: €11,250

 

If you are enrolled in an employee pension scheme, the contributions made by your employer to your pension are not deemed taxable as a Benefit-in-Kind (BIK), which essentially means that you are not taxed on the contribution that your employer makes on your behalf.

 

For instance, based on the details above, Marie has the option to contribute up to 25% of her salary towards her pension. Currently, she contributes 10% of her salary each month, and her employer also contributes 10%.

 

 

Marie and her Employer’s Pension Contributions

 

Marie and her Employer's Pension Contributions - The Benefits of Employer Pension Contributions

 

 

 

 

 

 

 

 

 

 

Due to Marie’s pension tax relief, at the higher marginal rate of 40% tax, her total contributions of €9,000 will only cost her €2,700 Net.

 

 

Marie contributes an AVC of 15%

 

In addition to these regular contributions, Marie has the ability to make an Additional Voluntary Contribution (AVC) once a year, equivalent to 15% of her salary. By doing so, she can maximize the tax relief benefits available to her. As a result, the combined contributions from both Marie (25%) and her employer (10%) could reach 35% of her gross salary annually.

 

Marie contributes an AVC of 15% - The Benefits of Employer Pension Contributions

 

 

 

 

 

 

 

 

 

 

By making an Additional Voluntary Contribution (AVC), Marie can maximize her contributions to avail of pension tax relief. She can contribute up to €15,750 annually with a combination of personal contributions, employer contributions, and AVC’s, while only costing her €6,750.

 

 

Employer Contributions to a PRSA

 

If you are a business owner or company director, you can also consider the updated Personal Retirement Savings Account (PRSA) funding opportunities that you may not be aware of.

 

As of 2023, a new change to pensions legislation resulted in a significant opportunity for company directors and business owners to fund larger pension pots than before. Since then, an employer contribution to a PRSA for an employee, is also no longer taxable as a Benefit-In-Kind (BIK) for that employee.

 

In essence, this change now allows an employer to contribute to a PRSA with no upper limit on employer contributions. In fact, the only limit is the lifetime Pension Fund limit which is currently €2,000,000. This rule change will be of significant interest for business owners and directors, as it means that they can now move profits from their business into a PRSA for themselves, for employed family members, and for employees.

 

 

Click here for illustrations

 

 

Complete the form below to get advice on your options

 

 

 

Should I wait for Auto Enrolment Pensions?

 

It is now looking increasingly likely that the government will be rolling out Pension Auto Enrolment in 2025. Here, they will make it mandatory for all employers to contribute towards a worker’s pension, which will be co-funded by the State, and workers/employees will be automatically signed up for a pension when they start work.

 

Who will be Auto Enrolled?

 

Anyone between the ages of 23 and 60, and who is earning over €20,000 a year, will automatically be enrolled into the pension scheme when they start a new job unless they have their own pension or access to an occupational pension.

 

How will Auto Enrolment affect employer and employee contributions?

 

Employer’s contributions will be capped at €80,000 gross annual salary. So for example, for the first three years in the scheme, the maximum amount the employer and employee will each be able to contribute per year to the pension will be 1.5% of salary (€1,200 each). The government will also contribute an additional 0.5% (€400) per year to the scheme. However, if you earn over €80,000 you can still contribute but your employer or the Government won’t match your contributions on earnings in excess of this.

 

Will Auto Enrolment benefit higher-earners?

 

Referring to the above case study with Marie, Auto Enrolment will have fewer incentives for higher-income earners from a contribution limit perspective, as most employer (occupational) pension schemes will be able to match an employee’s contributions up to a certain limit—5% is average, but it can be up to 10% in some cases. Not to mention that if you contribute to a PRSA, you have the potential for an even higher scope for employer contributions for an employee or Company Director! So, more generous.

 

Auto Enrolment will also be less generous from a tax perspective. If you pay tax at the top rate of 40%, this is the equivalent of the Government giving you back €400 back for every €1000 that you save, whereas, the Auto Enrolment scheme will only offer 33% tax relief. So you will get more bang for your buck if you are a single person earning over €42,000 p.a and you pay tax at the higher marginal rate of 40%.

 

On the other hand, if you earn under €42,000 as a single person, you therefore only pay tax at 20%, this is the equivalent of the government giving you €200 back for every €1000 that you save. So, the Auto Enrolment scheme will be more generous for lower-income earners (33% tax relief available). 

 

Auto Enrolment Summary:

 

Higher-income earners: Better to save into an occupational pension offered by your employer.

Lower-income earners: Better to go with the Auto Enrolment scheme.

 

 

More on Auto Enrolment Pensions

 

 

 

 

 

Employee Attraction, Retention, and Engagement

 

Employee Retention and Attraction

Offering a competitive pension scheme with employer contributions for your staff can significantly improve employee retention and attraction. In today’s job market, employees value benefits that go beyond salary, and a robust pension plan with employer contributions is highly valued. If you are an employer and offer your employees a pension plan, they will be more likely to stay with your company as they will feel valued. Additionally, pension benefits can help attract talented individuals who are seeking opportunities with companies that prioritize employee well-being.

 

Improved Employee Engagement

An employer pension plan can also improve employee engagement. When employees feel that you are invested in their financial future, they are more likely to be motivated and engaged in their work. A sense of security and confidence in their retirement savings can alleviate financial stress and allow employees to focus on their current responsibilities. As a result, as an employer, you may find increased productivity, higher job satisfaction, and a positive work environment.

 

 

What are my options?

 

1. Employer pension:

  • If your company gives you the opportunity to join their pension scheme, it is advisable to contribute to the scheme as this is a fantastic way to build up your retirement savings in tax-efficient manner. If you want to know how much you and your employer contribute to the plan, get these details from your employer. It’s a good idea to find out if you can take advantage of AVCs to increase your contributions and enjoy the associated tax benefits.

 

  • If you are an employer, you have various employer pension options available to you, such as an Executive pension, Master Trust pension, or PRSA. You will need to carefully assess these options as they are not a one-size-fits-all. These will depend on your requirements as a business owner, especially if you are considering your own retirement provision needs.

 

2. Private pension:

  • If your workplace doesn’t offer an employer pension plan, you can set up your own PRSA (Personal Retirement Savings Account) and make your own contributions through your payroll. Your employer is obliged to give you access to at least one Standard PRSA. You will also receive PRSA tax relief at source on your contribution through your payroll.

 

 

Where to from here:

 

Employer pension contributions have numerous benefits for both employers and employees. They increase retirement savings, provide tax advantages, aid in employee well-being, and enhance an employer’s reputation. If you are an employer and are thinking about the best pension options for you and your staff, our Financial Advisors have an array of pension contribution and funding options available to you.

 

If you’re an employee, you may have questions or need help reviewing your company pension scheme. You may also be looking at other funding options such as AVC’s. You may be in a job where there is no company pension scheme at all. Our Financial Advisors can assess your situation and advise on the best options available for you.

 

Feel free to submit your details below and our financial advisors will get back to you promptly.

 

 

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Maximize Your Pension Contributions in Ireland

 

To maximize your pension contributions in Ireland, there are several strategies you can consider of which if used holistically can help build effective long term wealth. Increasing your pension contributions is not only an effective way to boost your retirement income but is also very efficient in minimizing your tax obligations by utilizing the tax breaks available through pensions.

 

Here are some steps you can take:

 

Pension Tax Relief

 

One of the main benefits of contributing to a pension in Ireland is the tax relief you can receive. Contributions to a pension scheme are eligible for tax relief at your marginal rate of tax, subject to the annual limits mentioned below. This means that if you are a higher rate taxpayer and are paying 40% in income tax you can claim back the same amount of tax by way of a pension contribution.

 

I.e.,  If you contribute €1,000 to your pension it will only cost you a net amount of €600.

 

The three essential tax incentives that pensions offer are as follows:

 

1. Tax relief on contributions – You can claim tax relief on contributions at your higher rate of income tax, 20% tax relief for lower earners and 40% tax relief for higher earners on all pension contributions.

2. Tax free growth – You do not pay tax on investment growth within your pension fund (No CGT, DIRT, or income tax).

3. Tax free lump sum – At retirement, you can take a tax free lump sum up to 25% of your fund when you reach age 60 (and in certain arrangements, age 50) up to a maximum of €200,000. The balance of your fund would then need to be taken as either an Annuity or Approved Retirement Fund (ARF).

 

 

Pension Contribution Limits

 

There are annual limits on the amount you can contribute to your pension while receiving tax relief. Contributions are limited by your age and income level, and full tax relief within these limits may be obtained. The maximum amount of earnings allowable for calculating tax relief is €115,000 per year.

 

Maximum Allowable Contributions

 

 

Standard example:

Fiona is 45 and earns €60,000 per year. The maximum she can contribute to her pension is 25% of €60,000, which is €15,000.

In this example, Fiona is in the higher tax bracket, and has a marginal rate of tax at 40%.

 

This means she can claim 40% tax relief (€6,000) back from the state on all her contributions, and will only being paying a net amount of €9,000, while realizing the total €15,000 contribution into her pension.

 

Max earnings example:

John is 51 and earns €200,000 per year. The maximum he can contribute is limited to €34,500, that is, 30% of €115,000 (max earnings allowable).

This means she can claim back 40% tax (€13,800) from the state on his total contribution of €34,500.

 

It’s important to keep updated on any changes to these limits, as they may vary over time.

 

 

Employer Pension Schemes

 

Whether you are an employee or an employer (business owner), it is definitely worthwhile considering contributing to an employer pension scheme. Employer contributions are subject to different contribution limits which are usually much higher than individual limits. This can significantly boost your pension savings especially if you are a key or executive employee in the company.

 

 

Employer contributions to occupational pension schemes

 

Employer contributions to an occupation pension are subject to different contribution limits regarding your earnings, years of service, and current or retained benefits. The maximum pension you can receive from an occupation pension is 2/3 of your final salary where the limit may be higher or lower depending on your years of service.

 

An example of the max pension contribution through an employer is illustrated using the ‘Ordinary Annual Contribution calculation’ referred to in the below case study.

 

 

 

Employer pension contributions to a PRSA

 

PRSA’s are becoming a popular option for retirement planning for both employers and employees. As of January 2023, employer contributions to a PRSA do not count as a Benefit in Kind charge. This means that contributions will not attract an income tax charge if your contributions are more than the personal tax relief percentage.

 

Example:

Darragh is 40 and earns €60,000 per year. He contributes 10% of his salary, or €6,000 annually, to his PRSA. His employer contributes 15% of the value of his salary, or €9,000 per year, to his PRSA.

At age 40, Darragh’s tax relief limit is 25%. He can still make an AVC of 15% of his salary to his PRSA.

 

What is now significant is that “the employer” will now be able to make unlimited BIK free contributions to the PRSA if you are a Company Director and want to extract wealth (profits) from the business without being taxed on them. Contributions will, therefore, not be limited by salary and service rules and full tax relief can be taken on the contribution in the year it is paid!

 

Find out more

 

 

 

Personal Pension

 

If your employer does not offer you a pension scheme or if you want to contribute additional funds, you can set up a private pension. There are two main types of personal pension plans available in Ireland, such as Personal Retirement Savings Accounts (PRSA) or Self-Employed Retirement Annuity Contracts (RACs).

 

Technically, employers are required by law to provide staff access to at least one Standard PRSA. It is designed to allow for flexibility when it comes to saving for your retirement and is set up as a contract between you and a pension provider. Tax Relief is available on the contributions you make towards your PRSA or RAC similar to the pension contribution limits mentioned above.

 

Speak with a financial advisor to determine the best option for your circumstances.

 

 

Additional Voluntary Contributions (AVC)

 

Consider additional voluntary contributions (AVCs): If you have a workplace pension scheme, you may have the option to make additional voluntary contributions on top of your regular contributions. AVC’s allow you to make further contributions to your pension, which can further enhance your retirement savings (refer back to the Employer PRSA example above).

 

 

Backdating Pension Contributions

 

Take advantage of backdating contributions. This is particularly relevant if you have unused pension contribution allowances or an income tax bill outstanding for the previous tax year, in which you want to reduce that tax owed to Revenue.

 

Before filing your next income tax return, take advantage of backdating tax relief to the previous year by making a lump sum pension contribution (using the pension tax relief calculation above). The contribution usually needs to be made by 31 October each year.

 

This is available for the self-employed, business owners, and PAYE workers. For PAYE workers or schedule E employees, this can be done by way of an Additional Voluntary Contributions (AVC) or a PRSA. 

 

Pension Review

 

It is important to review your pension regularly to ensure it aligns with your financial goals and retirement plan. This can involve monitoring your contributions, investment structure and performance, fees and charges, and any changes in legislation to ensure that your pension is not negatively impacted.

 

It’s always advisable to consult with a financial advisor who can provide up-to-date and personalized advice based on your specific situation and individual circumstances.

 

 

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