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September 4, 2023

Irish Private (Personal) Pensions: Everything You Should Know

Private pensions usually refer to personal pensions in Ireland. Learn about personal pensions, how they work, their types, claims, and more.

Aine Kavanagh

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Aine Kavanagh

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Private pensions refer to pension schemes provided via a private entity, like Irish Life, rather than the Irish government.  

It includes two types of retirement savings schemes:

  • Occupational pensions: Set up by employers for employees. 

  • Personal pensions: Set up by individuals themselves.  

In Ireland, private pensions typically refer to personal pension plans, which we’ll discuss in this article.  

Further Reading

  • Want to join a government-backed pension scheme? Understand how the Irish State Pension system works. 

What Is a Personal Pension in Ireland?

A personal pension is a retirement savings plan that lets you contribute to your pension fund on a regular or once-off lump sum basis.

It’s for individuals who: 

  • Are self-employed.

  • Work for an employer that doesn’t offer an occupational pension scheme.

  • Prefer not to join the employer’s company pension plan. 

However, anyone (regardless of their employment status) can join a personal pension scheme. 

So you may be wondering…

Can I Have an Occupational Pension Scheme and a Personal Pension Scheme? 

You can join occupational and personal pension schemes, but you may not be eligible for tax benefits from both. This is because you can’t simultaneously contribute towards an occupational and personal pension scheme for the same job. 

However, if you have multiple jobs, you can make separate private pension arrangements for your earnings from each job.

How Do Personal Pension Schemes Work in Ireland?

A life assurance or investment company manages personal pension schemes. They distribute your pension contributions in different investment options like government bonds, stocks, equities, etc.

When you retire, your pension savings will consist of your monthly contribution and any growth you made by investing your money in different investment funds. 

When Can You Claim Your Personal Pension Fund?

You can claim your personal pension in any of the following cases:

  • You’re above 60 and under 75 years of age. In this case, you don’t have to take retirement or stop working to claim your personal pension fund.

  • You’re in a profession where the usual retirement age is before 50, for example, a sportsperson like a football or rugby player. 

  • You’re suffering from a severe illness and are unlikely to work again — in this case, you can claim your pension fund at any age. 

2 Types of Personal Pension Schemes in Ireland 

The two types of personal pensions available in Ireland are:

  • Personal Retirement Savings Account (PRSA)

  • Retirement Annuity Contract (RAC)

Let’s explore each type. 

1. Personal Retirement Savings Account (PRSA) 

A Personal Retirement Savings Account (PRSA) is an investment account you can use to save for retirement. 

You invest your money in various funds and make regular or lump sum payments towards your PRSA, for which you can typically claim tax relief. 

Here’s the low-down on PRSAs in Ireland:

  • The benefits of PRSAs are as follows:

    • PRSAs are flexible — you can increase, decrease, or stop your contribution as needed without incurring any penalty. You can also continue contributing to a PRSA even after retirement.

    • You can carry your PRSA from job to job and even change your PRSA provider without incurring any charge. 

  • Anyone above 18 and under 75 can open a PRSA.

  • A PRSA is a contract between the individual and the PRSA provider, like an insurance company or bank. So, depending on the type of PRSA, you must pay the provider a fee (aka charge) for handling your PRSA. 

  • PRSAs are of two types:

    • Standard PRSA: In a standard PRSA, the provider can’t charge you more than 5% on each contribution you pay and 1% a year on your fund’s value. Except for temporary cash holdings, you can only invest in pooled funds like mutual funds. 

    • Non-Standard PRSA: In a non-standard PRSA, there isn’t any limit on the charges or investments. 

  • An employer must facilitate access to standard PRSAs for their employees in any of the following cases:

    • The employer doesn’t have an occupational pension scheme. 

    • The employee is only included in the company pension plan for death-in-service benefits.  

    • The employee isn’t eligible to join the employer’s pension scheme, or they must wait for more than six months (from when they joined) to be eligible. 

    • The occupational pension scheme doesn’t allow employees to make Additional Voluntary Contributions (AVCs)

  • As an employer, you can contribute to your employee’s PRSA — although you aren’t legally required to. These contributions will be subject to the Finance Act 2022.

2. Retirement Annuity Contract (RAC) 

A Retirement Annuity Contract is a type of pension approved by the Revenue.  

You can obtain an RAC directly from a life assurance company, a trust, or through a financial advisor.  

How Do RACs Work?

The money you contribute towards an RAC is typically invested in bonds, government funds, etc., and can cause the value of your pension benefits received from an RAC to fluctuate.

The income you receive at retirement depends on: 

  • Your total contributions.

  • The performance of the investments made with those contributions.

  • The cost of purchasing the pension benefits.

You can claim tax relief for the amount you contribute to an RAC, provided that the Revenue has approved your RAC for tax purposes. You can always contact your RAC provider for more information.

But remember:

Only individuals with "relevant earnings" can set up an RAC — you can’t contribute income from other occupations to an RAC.

Relevant earnings include any income generated through self-employed trade, profession, or non-pensionable employment (such as employment without an occupational or company pension).

How Is Personal Pension Taxed in Ireland?

All pension schemes in Ireland (except the State Pension) are subject to tax under the PAYE (Pay As You Earn) system. 

You must pay income tax on your annual retirement income if you’re an Irish citizen above 66. 

The initial portion of your income is subject to a standard tax rate of 20% based on the standard rate cut-off points, and the Revenue may tax any remaining income at a higher rate of 40%.

Here’s an example:

Suppose you’re single and earning less than the standard cut-off point of €42,000 (for a single person). The Revenue will tax your entire income at a standard rate of 20%. 

However, if you earn more than €42,000, the Revenue will tax the initial €42,000 of your income at a standard tax rate of 20% and the remainder at a higher tax rate of 40%.  

Can You Get Tax Relief on Personal Pension in Ireland?

You can get tax relief on your personal pension contributions if you’re an Irish citizen under 75.

However, certain limits exist on the maximum amount you can receive income tax relief on. 

What are these limits?

Depending on your age, you can contribute a part of your earnings to your personal pension plan and receive tax relief on that specified amount. 

This is known as the age-related percentage limit

Another limit is the total earnings limit —  the maximum income you can earn in a year to be eligible for tax relief. It's capped at €115,000 as of 2024. 

There’s also a limit on the overall fund value for which you receive tax relief. This is known as the Standard Fund Threshold or SFT, which is €2 million in 2024.

If your personal pension fund exceeds the SFT, a 40% tax will be charged on the excess amount when it’s withdrawn from the fund. 

As of April 2024, the SFT is under review by the Irish Minister of Finance.

How to Claim Tax Relief?

If you’re a PAYE employee, your employer will usually deduct contributions from your salary and give you the amount you were due to receive as tax relief.  

However, if your employer doesn’t deduct tax relief from your salary or you’re self-employed, you can file your tax returns on the Revenue Online Service (ROS) Website. 

Learn more about Tax Relief on Pension Contributions in Ireland.

How to Claim Your Personal Pension Fund at Retirement in Ireland?

There are many ways to claim your pension fund at retirement. These include:

1. Taking a Tax-Free Lump Sum

When you retire, you can claim up to 25% (a maximum of €200,000) of your pension fund as a tax-free lump sum.

Any lump sum withdrawal above this limit is taxed as follows:

  • Standard tax rate: Amounts between €200,001 and €500,000 are taxed at 20%.

  • Marginal tax rate: Sums over €500,000 are subject to PAYE at the marginal rate of 40%.

2. Purchasing an Annuity

An annuity is a retirement payment option that guarantees you a regular monthly income in retirement for the rest of your life.

You can use all or a portion of your retirement fund (PRSA or RAC) to purchase an annuity and get regular pension income in retirement. 

How to Purchase an Annuity in Ireland?

You must transfer your pension fund to a life assurance company; in exchange, they will provide you with a regular income for the rest of your life. 

But look:

The amount you receive from your pension provider as a regular income depends on factors like:

  • The amount available in your pension fund.

  • Your age and health conditions.

  • Your gender.

  • The annuity rates offered by the company. 

3. Investing in an Approved Retirement Fund (ARF)

An Approved Retirement Fund is a post-retirement fund where you can invest the amount accumulated in your pension as a lump sum. 

An ARF lets you withdraw money anytime you want to ensure you have flexible and regular income in retirement. 

A life assurance company invests your ARFs in government bonds, equities, funds, properties, etc., so the amount you originally invested is not guaranteed to retain its value. Your fund may become significantly smaller over the years. Consult financial advisers for expert advice before making investment decisions like taking out an ARF.

What Happens to Your Personal Pension Fund After Your Death?

If you die before retirement and are in a personal pension scheme, the amount in your fund will become a part of your estate (i.e., your property, possessions, savings, investments, etc.) and be distributed to your spouse or civil partner. 

If you don’t have a spouse or civil partner, you can nominate beneficiaries under a trust — they can claim your pension benefits after your death. 

To add beneficiaries, complete an “Expression of Wishes” or a “Nomination Form”.

The treatment of your pension fund after your death varies based on the type of retirement option you have opted for:

  • Annuity: 

    • If you have purchased a single-life annuity, your pension fund won’t be transferred to your dependants. 

    • Since life assurance companies pay single-life annuities only for your lifetime, the annuity payment will cease after your death, and the amount you paid from your pension fund to purchase an annuity will be lost. 

    • However, if you have a joint-life annuity, your spouse or civil partner can continue to receive the annuity on your behalf. 

  • Approved Retirement Fund: 

    • If you have an ARF, the amount in your fund will become a part of your estate. It will be treated as regular income in the year of your death and transferred to your spouse, children, or other beneficiaries you nominated. 

    • The tax treatment will vary depending on who inherits your fund. For example, if your spouse or civil partner inherits your ARF, they will not have to pay the Capital Acquisition Tax (CAT). But if someone other than your spouse or children inherits your ARF, they must pay the CAT and income tax at a 40% marginal rate.  

Secure Your Retirement with a Personal Pension in Ireland 

A personal pension scheme can help you maximise your retirement savings if you’re self-employed or don’t have access to an occupational pension scheme.  

It can give you greater flexibility in contributions, allowing you to tailor your plans to meet your retirement goals. 

To better understand your pension options, seek expert financial advice from certified advisers. They will also help review the performance of your investment strategy regularly. 

Aine Kavanagh

Article written by

Aine Kavanagh

👋🏻 Hi I'm Aine, Head of Customer Success at Kota. Whether you're a Kota customer, a Kota user, or you're just browsing, I hope to help educate and empower those who want to know more about owning their own benefits, and building financial autonomy 📚

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