At this time of year you get bombarded with advertisements on radio, TV and all the other types of media about pensions. Why is that?
There are a couple of drivers behind this but mainly, there is a tax deadline looming. If you are registered with ROS (revenues online service) you have until November to pay and file your taxes for last year, i.e. 2014. If you are not registered your deadline was October 31st but don’t sweat it if you get yourself a tax planner or accountant there is still time.
What some people don’t realise, particularly PAYE workers, is that they can still make a pension contribution now and write it off against 2014 taxes.
For a self-employed person what they are doing is finalising their bill for last year and then paying 100% of lasts years’ bill as a down payment for this year.
If they make a pension contribution now it reduces last year’s bill which has the knock on effect of reducing this year’s down payment too.
Let’s imagine you had a tax bill to pay for 2014 of €10,000 and then prelim of €10,000 for 2015. You write a cheque for €5000 for your pension, this will reduce both last year’s bill and the prelim you have to pay by 41% of the €5000 (€2050)
So your choice is write one cheque to revenue now for €20,000 or a cheque for €5000 to your pension and €15,900 to sort out your taxes. Total outlay is only €900 more and you still sort revenue out.
You can play with this figures by using my calculator You’ll find it by clicking here/
For the PAYE worker it is very straightforward. Assuming all your taxes were paid correctly last year through your payroll, if you write a cheque now you should get the tax refund before Christmas.
So if you write a cheque for €10,000 you should get €4100 back before Christmas. (Assuming you paid 41% tax on €10,000 of your income in 2014)
The difficulty for a PAYE worker is they may not have access to cash. It is not possible to give advice in a format like this and nothing replaces getting sound financial advice on your personal situation from a qualified professional but you should consider what other investments you could access to make a contribution. I am not saying you should definitely cash in a long term investment to do this I am saying you should look at the option of cashing it in.
According to the latest central bank figures Irish households have €94billion on deposit. That’s up €2 billion from a year ago. At a time when deposit rates are at an all-time low people should be considering putting some of this into their pensions.
There is also a way of selling shares you own personally to your pension but that would definitely need some 1 to 1 advice.
People often fear pensions because they are worried about how risky pensions are. Firstly I know of no other investment vehicle that turns €60 into €100 immediately. Secondly what people don’t realise is that the vast majority of investment options you have outside your pension work inside your pension too. You can even invest your pension in a deposit account if you want.
Not only that when you use your pension to buy things like shares or property you don’t pay tax on the rental income and you don’t pay capital gains tax on the disposal.
Another advantage of contributing to a pension at this time of year is the pension providers are fighting for your business so there are special offers available. Keep and an eye on the fine print but it is possible to get bonuses on your investment if you choose wisely.