Many of us are of course making pension contributions to some degree with the aim of achieving a comfortable retirement, an issue I have previously discussed on this blog.
However when we actually look at the tax relief available on pensions, it is difficult to understand why more do not avail of the pension investment option, particularly as a high rate tax payer.
Simply put, pension tax relief makes it more attractive to save for your retirement by giving you generous tax breaks on the money you invest in your pension. Essentially, your tax relief is provided in three phases;
- Tax relief on contributions
- Tax relief on investment return
- Tax free lump sum at retirement
It is the tax relief on contributions I want to focus on today; simply put as a higher rate tax payer if you contribute €100 to your pension, due to tax relief available of 41%, it costs you only €59.
If you put a Single Premium of €10,000 into your pension, as a higher rate tax payer the net cost to you after tax relief is €6,000! If you were to invest the sum of €6,000 into your pension, you would achieve this instantly!
If we consider this for a moment; if we invested the sum of €6,000 – how long do you think it would take this sum to grow to the sum of €10,000? The answer is that if we assume a net return of 2.25% compounded return, it would take 21 years!
This is a startling reminder of the power of pension planning and the tax efficiency of same; not only are you planning your future you are doing so in an extremely tax efficient manner and making your hard earned money work for you!
If you want to discuss this please contact us.
This is an opinion only and does not constitute advice as individual circumstances will determine all financial advise given.