Tax on Pension

pavb2

Hi all just wanted a bit of clarity on two points. Running my own business for the past few years and my previous pension manager said that putting money in to a pension was effectively tax free.

So having changed to a new pension manager he says that this is not strictly speaking true as when you buy an annuity at retirement the income from this annuity is taxable.

Also is it true that if I buy an annuity for say €100k at retirement and drop dead the next day my dependants get nothing? There must be some way of protecting this at least if you bought a house for 100k you don't lose the house on death.

Like to hear comments and alternatives

Deise Vu

pavb2 wrote: »

Hi all just wanted a bit of clarity on two points. Running my own business for the past few years and my previous pension manager said that putting money in to a pension was effectively tax free.

So having changed to a new pension manager he says that this is not strictly speaking true as when you buy an annuity at retirement the income from this annuity is taxable.

Also is it true that if I buy an annuity for say €100k at retirement and drop dead the next day my dependants get nothing? There must be some way of protecting this at least if you bought a house for 100k you don't lose the house on death.

Like to hear comments and alternatives

Income from a pension fund is taxable the same as any source of income. Income earned within a pension fund is tax free. That is a mechanism to grow the fund but it most certainly will be taxed when you get your paws on it.

If you drop dead soon after you buy an annuity there is usually a provision that your estate will be guaranteed 5 years of the annuity (ie if you die after 2 years a sum equal to three years pension is paid to your estate).

Hold fire until the budget, if they reduce the tax credit steer a million miles away fro mpensions. You are far better off having 80% of your pension contribution yourself rather than giving some tweat carte blancche to rape you with fees and piss-poor performance. And thats before the 'temporary' 0.6% per annum (of your total fund) that is robbed by the Govt to pay more deserving pensioners such as Bertie and Brian.

digzy

Deise Vu wrote: »

Hold fire until the budget, if they reduce the tax credit steer a million miles away fro mpensions. You are far better off having 80% of your pension contribution yourself rather than giving some tweat carte blancche to rape you with fees and piss-poor performance. And thats before the 'temporary' 0.6% per annum (of your total fund) that is robbed by the Govt to pay more deserving pensioners such as Bertie and Brian.

Couldn't agree more with you. However it's almost impossible to have a pension that avoids these fees.

digzy

pavb2 wrote: »

Hi all just wanted a bit of clarity on two points. Running my own business for the past few years and my previous pension manager said that putting money in to a pension was effectively tax free.

So having changed to a new pension manager he says that this is not strictly speaking true as when you buy an annuity at retirement the income from this annuity is taxable.

This is my main gripe with the chancer/brokers. They all go on about the relief but dont explain the tax must be paid on exit. As regards avoiding cgt, it wouldn't be a problem on any of my pensions. They're utter rubbish and a complete sham. Once the tax relief goes you'd wanna be a moron to invest in one of them.

STP50

Pensions Fund are a tax effective means of putting money away for your old age.
There are three points of taxation - all of these are subject to limits & rules that get complex - but broadly
1.Money in - Currently you do not pay income tax on the money you put into the fund. There are limits to what you can put in depending on age to cap this tax break.

2.Returns earned - Currently there are no capital gains on the returns earned within a pension fund. I am aware that the last 10 years returns have been very bumpy, however, if you have enough years to invest you should increase your investments.This return is not taxable for you.

3. Money out - there is a lump sum amount that can be taken tax free - again this is capped and subject to rules (1/5 times salary, minimum income etc)

So the point is that you can get your self a substantial sum of money at retirement very tax effectively. Any other type of saving is made from after tax income and if it increases in value you are also taxed on that increase as a capital gain. (property/shares).

All of these types if investments have costs associated with them - and if you invest in a pension fund you should research the charges carefully.

When you arrive at retirement with your 'pot' you are required to go out an purchase a pension (annuity) or alternatively you can put it in an ARF(again more rules).
The retirement annuity is an insurance contract that takes a punt on how long you live. If you live a long time you will earn more than you paid, if you die early the insurance company wins. It simply gives income as long as you are alive. You can purchase options that pay a smaller amount to your spouse if you die young, also most annuity contracts will pay out for a minimum of 5 years. Again you need to shop around!

There is a option of an ARF - if you have a minimum income (18k think) you can put the lump sum into an ARF- another investment fund (similar to the pension fund investment features). This will become part of your estate when you die - however if you live a long time this could run out!!

You need to get good advice - now when setting up you pension fund ( keep asking questions till it is explained to you clearly) and also when you retire.

The government are moving the rules here to make it less attractive - Pension are seen as a soft option when cash is needed. So this needs to be considered carefully over the next few budgets - however Pension funds still have attractive tax breaks compared to property or stocks.

Henry Ford III

STP50 wrote: »

Pensions Fund are a tax effective means of putting money away for your old age.
There are three points of taxation - all of these are subject to limits & rules that get complex - but broadly
1.Money in - Currently you do not pay income tax on the money you put into the fund. There are limits to what you can put in depending on age to cap this tax break.

2.Returns earned - Currently there are no capital gains on the returns earned within a pension fund. I am aware that the last 10 years returns have been very bumpy, however, if you have enough years to invest you should increase your investments.This return is not taxable for you.

3. Money out - there is a lump sum amount that can be taken tax free - again this is capped and subject to rules (1/5 times salary, minimum income etc)

So the point is that you can get your self a substantial sum of money at retirement very tax effectively. Any other type of saving is made from after tax income and if it increases in value you are also taxed on that increase as a capital gain. (property/shares).

All of these types if investments have costs associated with them - and if you invest in a pension fund you should research the charges carefully.

When you arrive at retirement with your 'pot' you are required to go out an purchase a pension (annuity) or alternatively you can put it in an ARF(again more rules).
The retirement annuity is an insurance contract that takes a punt on how long you live. If you live a long time you will earn more than you paid, if you die early the insurance company wins. It simply gives income as long as you are alive. You can purchase options that pay a smaller amount to your spouse if you die young, also most annuity contracts will pay out for a minimum of 5 years. Again you need to shop around!

There is a option of an ARF - if you have a minimum income (18k think) you can put the lump sum into an ARF- another investment fund (similar to the pension fund investment features). This will become part of your estate when you die - however if you live a long time this could run out!!

You need to get good advice - now when setting up you pension fund ( keep asking questions till it is explained to you clearly) and also when you retire.

The government are moving the rules here to make it less attractive - Pension are seen as a soft option when cash is needed. So this needs to be considered carefully over the next few budgets - however Pension funds still have attractive tax breaks compared to property or stocks.

Sorry I have to comment on that as it's horribly innaccurate and even misleading.

2/. Profits and gains. Pension funds pay no internal tax (bar the nasty 0.6% levy) and whilst that includes CGT it also applies to income tax, corporation tax, tax on dividend income, and DIRT.

3/. Tax free lump sum amount depends on whether you are emplyed or self employed.

Self employed can get 25% of their entire fund subject to limit, and employees can get up to 150% of final salary subject to service and Revenue limits.

The entire pensions area is complex, and I agree good advice is well worth paying for.

Carawaystick

There currently is a tax break for old people (>65) I think who get double the tax credits of the rest of us. They also pay lower usc and there's no/less prsi on pension income also.

pavb2

Thanks some very good points made there. I really think you need to do some research as investing in pensions becomes more complex the more you look into it.

I'm down about 40% on what I paid in to my pension I look upon it as my negative equity.

If anything the last few years have taught us there are no safe havens, property? BOI shares? etc . I'm okay with my decisions as at the time and maybe even now it is still the best option though the goalposts are being moved an awful lot.

Anyway like so many others I don't have anything to put away so don't need to worry about where I invest for the moment.