Many people in Ireland who have money to invest or save are looking to find ways in which they can minimise their overall tax bill.
When you put money in interest earning account at a bank, your interest earnings are liable to 41% DIRT (Deposit Interest Retention Tax).
This is also similar when you save in a share a/c at a Credit Union, where the dividend you receive is liable to 41% DIRT. Moving away from the safety of Banks & Credit Unions, you can invest your money in the markets, where you can expect a 41% exit tax on your capital gains on your investment.
So how can you invest your money tax efficiently without feeling the pinch of the taxman in the back pocket?
Simply put, in Pensions.
This is because the Government allow your Pension Funds to accumulate tax free without any 41% DIRT or 41% Exit Tax. And when you do retire, you can access what is known as a tax-free lump sum of up to €200,000 under the current legislation.
What happens is, you earn what you earn in your pension scheme, then when you retire your pension pot you can take up to €200,000 Tax Free. Then the next €200,001 to €500,000 is taxed at 20% and the balance left over is taxed at 40% if you are lucky enough to have a pension pot that big!
Another great part of investing in a pension, is that you can look to make a return on investment greater than interest earned in a bank account. There are risks of course. A pension can be invested in many different types of funds, from the safest asset classes of Cash & Sovereign bonds to higher risk investments such as equities.
But the point is, you can choose the funds your pension is invested in based on your attitude to risk and look to earn beyond the average 1% in fixed term deposit accounts. The reason is that inflation, as in the cost of good of services increasing year on year will lower the purchasing power of your money deposited in a bank account.
There is also the added benefit that you can get back tax paid to revenue during the year, back on every pension contribution you made. For Example:
- A 20% Tax Payer contributes €100 per month to a Pension Plan with a Life company. They get back €20 from the Government from the €100 as tax relief. Essentially, they have a gross investment of €100 in the Life Companies investment funds, but only paid €80 for it.
- And if you are earning in 40% tax bracket, you can get back €40 on the same contribution of €100.
Now, when you do decide to invest in a pension, it is best to consult a Financial Advisor who is experienced in, Life Companies, their fund charges and ultimately fund choices. As it’s an investment with risk attached, getting the best advice possible is a wise decision.
Alan Murtagh QFA LCOI – Director of Irish Insurance
Philip Keane CFP®, QFA, SIA, LIB, BBus (Acc/Fin) – Sales Manager Irish Insurance
