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Does it still make sense to top up your pension?

With the pay and file deadline rapidly approaching, you might be considering whether it makes sense to top up your pension this year, or even to start a pension for the first time

Making regular contributions to your pension fund is the bare minimum – but on its own, it’s not enough. You also need to invest your fund so that it generates a further return on your investment.

Making regular contributions to your pension fund is the bare minimum – but on its own, it’s not enough. You also need to invest your fund so that it generates a further return on your investment. Photograph: Getty Images

 

For most of us, it has been a tough year with massive change impacting many aspects of our lives. For some, the financial pressure may have been overwhelming and the uncertainty of what lies ahead can often result in deferring financial decisions.

How much should I contribute?

First of all, you need to make sure that your financial needs are looked after before making pension contributions. A pension is for life and once the money is in the pension it can’t be accessed until you reach retirement age.

There is no minimum prescribed amount that you need to contribute, and the maximum contributions are dictated by Revenue limits on tax relief. Even if you were to contribute the maximum amounts, it’s unlikely that the pension fund would be able to replace your income in full in retirement.

The maximum net relevant earnings figure for tax relief purposes is €115,000. The percentage relief limits are:

Age

Tax relief as a percentage of earnings

Under 30 years

15 per cent

30 – 39 years

20 per cent

40 – 49 years

25 per cent

50 – 54 years

30 per cent

55 – 59 years

35 per cent

60 years plus

40 per cent

Source: Revenue.ie

There’s no time like the present

It might be a clichéd phrase, but the sooner you start, the better the outcome. The pension fund is a gross roll up, tax-free structure. It really doesn’t get much better than this when it comes to saving money. Not only do you get tax relief on your pension contributions, but the income and gains within the pension fund can grow tax free of income tax, capital gains tax and most fund exit taxes. By starting sooner, the long-term impact of compounding tax-free growth year on year on your investment is an opportunity not to be missed.

Make your fund work for you

Making regular contributions to your pension fund is the bare minimum – but on its own, it’s not enough. You also need to invest your fund so that it generates a further return on your investment. Before you take this step, however, you should have a good financial plan in place that is tailored to your personal circumstances and built around, amongst other things, your specific retirement objectives.

Paula Finlay, associate director, Davy Private Clients

What do I need to do?

At Davy, we’ve a team of experienced advisers ready to help you, especially during these challenging times. Why not request a no-obligation call with a member of our team today? Call +353 1 614 3346 or visit davy.ie


Warning: The value of your investment may go down as well as up. If you invest in this product you may lose some or all of the money you invest.

Warning: The information in this article does not purport to be financial advice and does not take into account the investment objectives, knowledge and experience or financial situation of any particular person. You should seek advice in the context of your own personal circumstances prior to making any financial or investment decision from your own adviser. The tax information contained in this article is based on Davy’s current understanding of the tax legislation in Ireland and the Revenue interpretation thereof. It is provided by way of general guidance only and is neither exhaustive nor definitive and is subject to change without notice. It is not a substitute for professional advice. You should consult your tax adviser about the rules that apply in your individual circumstances. Davy is not responsible for the interpretation of this information and any submissions made by you or a third party on your behalf thereon.

J & E Davy, trading as Davy and Davy Private Clients, is regulated by the Central Bank of Ireland.