TAX PLANNING FOR YOUR PENSION

It is last-chance saloon for pension savers as the Government tax grab takes hold from next Sunday, The Sunday Times advises.

On September 25, trustees will be forced to deduct the Government’s new pension levy for 2011 from their schemes. It will be imposed on 0.6% of the value of their funds for four years and this squeeze will likely intensify next year with the reduction on tax reliefs on contributions, the newspaper warns.

There is no avoiding the pension levy unless you decide to become a tax exile, which means moving your pension abroad and spending fewer than 183 days a year in Ireland.

However, there are some practical steps still open to maximising the reliefs still available.

“Pension top-ups made in the next six weeks can qualify for relief up to 49% (41% income tax, 4% pay-related social insurance and 4% health levy) by backdating the claim to 2010,” the article advises, pointing out that the maximum break after the self-assessment deadline would be 41% because 2011 contributions qualify only for relief on income tax.

But many people are justifiably worried that putting money into a pension scheme is effectively throwing good money after bad given the performance of the average fund over the past few years and the ongoing volatility in world financial markets.

Some pension providers have responded to the volatile financial markets by introducing cash alternatives. Irish Life’s Global cash fund, for example, spreads investment across 17 non-Irish banks with credit ratings of A or better. While you would earn better returns from Irish banks, their credit ratings are a lot poorer.

If you are nearing retirement you should also consider making last-minute top-ups ahead of the deadline because it maximises the tax-free lump sum available when you finish work. If, for example, you earn €60,000 and have worked 28 years in the public service, your lump sum would be €63,000 but you could increase it to the maximum of €90,000 by paying the €27,000 shortfall into a AVC (Additional Voluntary Contributions) fund prior to retirement. This means for an outlay of €27,000, you would get €38,070 – €11,070 in tax relief and a €27,000 lump sum.

The article also advises transferring pensions from previous jobs as complications can arise if a company goes bust. Although your pension should be protected, it may not be managed as well as it could be after a company goes out of business. You should transfer to buy-out bonds, which you can unlock after reaching 50 while continuing to work.

Company directors should consider getting their companies to make pension contributions on their behalf rather than doing it personally. This would allow them to contribute more to their retirements as there are strict limits to the amounts an individual can put in. For example, €17,500 in your 20s, €23,000 in your 30s, €28,750 in your 40s, €34,500 from 50-54, €40,250 from 55-59 and €46,000 after 60.

“Directors can avoid these limits by getting their companies to make contributions on their behalf,” the article advises. “If you are 55 and plan to retire at 60, for example, your company could pay up to four times your salary into an executive pension plan each year until retirement.”