Many people are giving money needlessly each month to the tax man, money that they could and should, be paying to themselves.

Over the years if I am talking with young people, who are reluctant to start up a simple little pension plan I say to them” why not pay yourself a little money each month instead of paying it to the tax man? “They say to me “what do you mean”?

If the young person I am talking with is between the age of 30 and 40 and is on an income figure of €40,000, they would in Ireland, pay tax at the high rate of 40%, on some of that salary.

I then explain that if they allow me to set up a little pension plan for them they can pay up to 20% of their taxable income figure of €40,000, that’s €667 per month into their own little private pension plan. If they do as I suggest this will save them tax of €267 each month (€3,200 a year).

Imagine if they are aged 35 and do this every month till they get to age 65 they will save tax in total of €96,000 … That’s a lot of tax saved!

Payback time

And not only have that but remember what I said that they would be paying this money each month to themselves. When they get to age 65 if the money they had invested each month grew by just 4% each year, their fund would be worth €463,000. That projected figure is of course not guaranteed as the pension fund value will rise and fall over the years. However because the growing fund is tax exempt, it is not an unrealistic possibility over a thirty year timeframe, especially, if that person has an average risk tolerance.

So what has been achieved….. 1) Tax saved of up to €96,000……2) Pension fund projection of €463,000… not a bad day’s work.

But that’s not all because in Ireland when you get to pension age of say 65 it is possible under our present tax rules to take 25% of the pension fund, within certain limits, totally free of tax.

This comes to 25% of €463,000……… €115,750.

With the tax saved of €96,000 added to the 25% tax free cash it comes to tax reliefs and tax free cash of over €211,750.

And of course not forgetting the main purpose of the exercise which was the creation of a nice tidy pension fund.  The residual value after taking the tax free cash will be €347,250 which is now available alongside the tax free cash fund of €115,750 to fund ongoing income for life. Happy days!

Go on……….Pay some money to yourself each month!

Ted Dwyer Family Business

Oct 2016