Lucas Financial Consulting Ltd

Tax Briefing 74: Crunch Time

Do not contribute to the wrong pension arrangement.

In September 2009, The Revenue Commissioners issued Tax Briefing Note 74: Tax Relief for Pension Contributions: Application of Earnings Limit. This briefing detailed how the earnings limit for pension contributions operates where an individual has two sources of income i.e. income from employment and income from self-employment and is making contributions to both an occupational pension scheme and a Personal Pension plan. The most obvious example of this would be a Medical Doctor / GP who has GMS income as well as earnings from his/her Private Practice.

If an individual has more than one source of income, they need to look very carefully at how their pension contributions qualify for tax relief. Having two sources of income (e.g. HSE and Private Practice) now means an individual can no longer contribute to a Personal Pension until their maximum capacity for AVC’s from their pensionable income has been used up.

In short, if income from pensionable employment is over €115,000 per annum an individual can no longer fund a Personal Pension or PRSA. This is because the earnings limit €115,000 has been used up through income earned through, for example, the HSE and therefore there is no more room to invest in a Personal Pension. ( This limit has been reduced from €150,000).

The result is that some contributions being made to Personal Pension plans and PRSAs are no longer eligible for tax relief from 7th September 2009 (subject to certain criteria).

So, it is crunch time.

Individuals will have to decide which contract they should be contributing to. If they are still contributing to a Personal Pension plan or PRSA they may not be able to get tax relief when they submit their tax return.

It is not all bad news. Individuals affected by this change can contribute to AVC PRSAs to get many of the same tax relief benefits which are associated with Personal Pensions or PRSAs. AVC PRSAs can be used for several purposes including the following:

•Reduce tax and increase Pension Pot

* Increase tax-free lump sum where full service is not expected.

• Increase tax-free lump sum where there is scope to increase due to difference between maximum pension entitlement and actual pension entitlements.*

* For example all recent public sector recruits are now paying PRSI rates giving entitlement to the old age contributory pension. This benefit is integrated with the public sector superannuation scheme benefit, resulting in a reduction in “Pensionable Salary”. This reduction in “pensionable salary” provides significant further scope for AVC PRSAs as the state contributory old age pension may be ignored for the purposes of  calculating the Revenue Maximum Allowance Pension Benefits.

Contact Your Local Independent Financial Adviser

Lucas Financial Consulting Ltd is based near Carrickmacross Co Monaghan. As we straddle four counties – Louth, Monaghan, Cavan and Meath we are ideally placed to become your new Local Independent Financial Adviser.

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