September 8, 2023
How Do Pension Schemes Work in Ireland? + How They Are Taxed
Ireland offers its citizens different social, occupational, and personal pension schemes. Learn about how they work and their taxation policies.
Article written by
A pension scheme is a savings arrangement that helps secure your financial well-being in retirement.
Various government and employer-sponsored pension schemes are available in Ireland. You also have personal pensions you can set up for yourself.
But how do these Irish pension schemes work?
Is your retirement pension taxed?
How can you get tax relief on your pension contributions?
Keep reading to get answers to all these questions and more.
Ireland's pension system comprises government-backed state pensions as well as private-sector occupational and personal pension schemes.
Here's a quick look at these pension schemes:
Ireland's social welfare pension schemes consist of the State Pension (Contributory) and the State Pension (Non-Contributory).
Both are weekly payments made by the Department of Social Protection to people aged 66 and above.
For more information, check out our detailed guides on these schemes:
Occupational pension schemes (aka company pension plans) in Ireland are employer-sponsored pension plans that offer regular income to employees in retirement.
Two popular occupational pension schemes are defined contribution and defined benefit schemes.
Here's everything you should know about Ireland's Occupational Pension Schemes.
Are you an employer looking to offer an occupational pension scheme in Ireland?
Meet Yonder — a digital pension app built for modern teams.
Yonder offers a defined contribution pension scheme that lets you enrol employees in a corporate Master Trust, giving your team complete control over their contributions.
It allows you to:
Offer flexible and portable retirement benefits to your employees in Ireland.
Set matching employer and employee contributions.
Compare the performance of your retirement plan locally with geo-based data.
Automate pension processes and reduce extensive paperwork.
Integrate pension management with your existing HR and payroll tools to reduce admin costs.
Join Yonder to automate and scale your retirement benefits effortlessly.
A personal pension scheme (aka private pension scheme) is a retirement savings plan individuals set up through an investment or life assurance company.
These are typically for self-employed people or workers whose employers don't offer occupational pension plans. But anyone can take one out - only they may not get tax relief on it if they already receive an occupational pension.
The two types of personal pension plans in Ireland are Personal Retirement Savings Accounts (PRSAs) and Retirement Annuity Contracts (RACs).
The Irish government plans to introduce the automatic enrolment retirement savings system in 2024.
This new scheme will:
Support nearly 750,000 Irish workers without an occupational pension plan who solely rely on the State Pension.
Auto-enrol all eligible employees into a workplace pension plan.
Operate on an 'opt-out' basis — giving employees the choice to opt out of the scheme for a limited period.
Be administered by the Central Processing Authority, which the government will set up to ensure all Irish workers have access to a workplace pension.
Here's a complete breakdown of the Irish Auto Enrolment Scheme, including its eligibility criteria and contributions.
Generally, all income you generate from Ireland's state, occupational and personal pension schemes is taxable.
You must pay income tax on your annual pension earnings if you're an Irish citizen aged 66 and above.
Here's an overview of how your pension income is taxed at retirement:
The first portion of your income is taxed at a standard tax rate of 20%, as per the standard rate cut-off points, and the remaining balance is taxed at a higher tax rate of 40%.
For instance, the standard cut-off rate for a single person is €40,000.
So, if you're a single individual earning €43,000 per year, the initial €40,000 will be taxed at 20%. The remaining €3000 will be taxed at a higher tax rate of 40%.
Let's take a look at how each pension scheme is taxed in Ireland.
If you joined a PRSA or an RAC, your pension will be taxed under the PAYE (Pay-As-You-Earn) system, which means your pension provider will deduct the tax from your pension income before it's paid.
You also have the option to use the money accumulated in your pension pot to purchase an annuity in retirement.
What's an annuity?
An annuity is a retirement payment option that guarantees you a regular monthly income in retirement for the rest of your life.
Income from annuities is also taxable within the PAYE (Pay-As-You-Earn) system and is subject to the Universal Social Charge (USC). This means your annuity provider automatically deducts the tax (usually at a higher tax rate of 40%) before you receive your payment.
Occupational pension schemes are taxed under the PAYE system and are subject to the USC.
However, they are exempt from PRSI (Pay Related Social Insurance).
Under the PAYE system, your pension income is taxed every time you receive your salary. This means that your employer deducts the income tax and USC from your paycheck and pays the deducted amount to the Revenue.
Moreover, in the case of an occupational pension scheme, there is a cap on the maximum pension income you can receive at retirement. This cap typically amounts to about two thirds of your final salary — provided you've completed at least 10 years of service.
You may also have to pay tax on your State Pension. However, the tax isn't deducted at source.
Here's how your State Pension will be taxed under different scenarios:
If you receive both the State Pension and occupational pension, your occupational pension is taxed through the Pay-As-You-Earn (PAYE) system (similar to how your regular salary is taxed).
When you pay taxes on your employment income, you receive tax credits.
For the taxation of the State Pension, your annual tax credits are reduced by the tax liability on your State Pension. So, while you pay tax on both pensions, it's only deducted from your occupational pension.
If you solely rely on the State Pension payments at retirement, the Revenue Commissioner may use various methods to tax your pension. This can include decreasing your personal allowance and tax credits.
However, it's important to note that you usually don't have to pay any taxes on your State Pension if you have a low income, and the State Pension is your only source of income at retirement.
You can only take up to €200,000 from your pension pots as a tax-free lump sum on retirement.
If your lump sum amount exceeds the €200,000 limit, it will be taxed on the following basis:
Between €200,001 to €500,000: Taxed at 20% standard tax rate.
More than €500,000: Taxed at a 40% marginal tax rate.
The withdrawal limits may also vary based on your pension arrangement type:
If you're receiving a personal pension, such as an RAC or a PRSA, you can claim 25% (up to €200,000) of the retirement fund as a tax-free lump sum.
If you're in an occupational pension scheme and have completed 20 years of service, you can claim a tax-free lump sum of up to 1.5 times your final salary if it exceeds the 25% limit.
An Approved Retirement Fund (ARF) is a post-retirement fund where you can invest the amount accumulated in your pension pot as a lump sum.
It lets you withdraw money from the fund anytime you want to ensure you have flexible and regular income in retirement.
Any money taken from an ARF is regarded as income and subject to PAYE tax rules, which include:
PRSI (Pay Related Social Insurance).
USC (Universal Social Charge).
From age 61, you must make a 4% mandatory annual withdrawal from your ARF, known as Imputed Distribution. This rate increases to 5% once you reach age 71.
However, if your pension fund exceeds the €2 million threshold when you're over 61, the starting minimum withdrawal or imputed distribution rate is increased to 6%.
Generally, you can claim income tax relief on your pension contributions (including Additional Voluntary Contributions – AVCs) if you have joined an approved pension scheme.
Occupational pension schemes.
Personal Retirement Savings Accounts (PRSAs).
Retirement Annuity Contracts (RACs).
However, certain limits exist on the amount you can claim as tax relief. These are:
Standard Fund Threshold: It's a lifetime limit on the overall pension fund value for which you can claim tax relief and is set at €2 million as of 2023. It applies to pension benefits obtained from occupational and personal pension schemes, and any excess amount you draw from your fund will be taxed at a higher tax rate of 40%.
Annual Limit: The amount of tax relief you can claim on your pension contributions in a year is subject to two limits:
The Age-related Percentage Limit: It's the maximum percentage of tax relief that you can claim on your pension contributions based on your age.
The Total Earnings Limit: This limit is imposed on the amount of income taken into consideration while calculating your tax relief. As of 2023, this limit is set at €115,000 and doesn't consider the employer's contributions to the employee's pension fund.
The same limits apply to your pension contributions if you're self-employed. However, in the case of self-employed individuals, 'earnings' refer to their 'net relevant earnings' (i.e., earnings from a trade or professional employment minus any allowable expenses).
Learn more about Tax Relief on Pension Contributions in Ireland.
Here are the answers to some commonly asked questions about pension schemes in Ireland.
The Pensions Authority is a regulatory body that regulates occupational and personal pension schemes (PRSAs and RACs), while the Department of Social Protection (DSP) manages the State Pension in Ireland.
A separate Pensions Council also works with the Minister for Employment Affairs and Social Protection to advise them on matters related to pension policies.
You can contact the Financial Services and Pensions Ombudsman (FSPO) if you have any issues related to pension schemes in Ireland.
They can investigate and decide on complaints related to occupational pension schemes, Personal Retirement Savings Accounts (PRSAs) and Retirement Annuity Contracts (RACs).
To make a complaint or report an issue, contact the FSPO at:
Phone: (01) 567 7000.
Email: [email protected].
In case of any issues regarding the State Pension, you can contact the Department of Social Protection at:
A supplementary pension in Ireland is an additional pension the Irish government pays to retirees whose occupational pension is reduced and balanced out by the State Pension (Contributory) payments.
It's the extra money you get if your full pension (without any adjustments) is more than the total of your current pension and the government benefits you receive.
While there's no set retirement age for employed and self-employed individuals in Ireland, most people retire by age 66 — when the State Pension payments begin.
Some employment contracts also have a mandatory retirement age of 65 and may offer employees early retirement options (from age 60 onwards).
Learn more about the Retirement Age in Ireland.
Due to Ireland's rising life expectancy rates (82% in 2021, as per Statista), the Irish government increased the State Pension age from 65 to 66 in 2014. While there were plans to further increase this age to 67 in 2021 and 68 by 2028, no changes in legislation have been made as of August 2023.
Usually, you can claim your pension fund when you're over 60 and under 75 years old.
But, if you suffer from a severe illness or disability and cannot return to employment permanently, you can claim your pension savings at any age.
Some occupational pension schemes let you take early retirement at the age of 50. However, it's only possible if the scheme's rules and your employer permit you to retire early.
Early retirement is also possible if you're in a profession where the usual retirement age is before 50, such as a sportsperson like a football or rugby player.
Pension schemes offer a structured and efficient way to save for retirement by ensuring financial security and reducing the risk of outliving one's savings.
Amid the growing cost of living in Ireland, a pension scheme can help you sustain your lifestyle in retirement.
However, all investments carry some amount of risk.
So, regularly monitor the performance of your investment funds with the help of your pension provider and consult financial advisers for expert advice.
Yonder launches UK workplace pension, partnering with Smart Pension
Product, Company News
August 10, 2023
Get started with Yonder today
👋 No initial fees or contracts – get started in minutes