Turn a savings pot of €120,000 on deposit, into €200,000 in 5 years…
Following on from planning for your retirement in last month’s article, I will give an example of how you can really take advantage of tax relief to grow your savings. The following example is theoretically possible for many people, subject to certain revenue guidelines and depending on what pensions you already have accrued.
I will use an example of a person aged 60 who may consider this proposal, for the purpose of this article. They either have no pension savings or are looking to boost their pension pot as much as they can before retirement. I am going to assume they are currently on a salary of €100,000 and are paying 40% income tax on more than €40,000 of their take home income. (for a married couple with one/two salaries, the income tax rate may differ).
Salary subject to 40% Tax | Income tax @ 40% | Income in pocket |
€40,000 | €16,000 | €24,000 |
- In this example I have not included PRSI / USC or any other expenses/benefits, this is just to highlight income tax relief potential.
In this illustration the “income in pocket” portion is the income you will be receiving into your hand after income tax has been deducted.
Say this person has substantial savings on deposit, for example €120,000 sitting in their bank account. We know that €40,000 of their annual income is only worth €24,000 into their hand after they pay income tax.
If you pay into a pension, you get tax relief at your standard rate (you do not pay income tax subject to revenue limits). So, for 5 years, this person could put €40,000 per year from their income into a pension. Their take-home income would decrease by €24,000 but if needed they could subsidize it (if they want) by taking funds from their €120,000 savings (€24,000 x 5 = €120,000). After 5 years they would end up with a pension pot of €200,000 at 65.
At 65 you could have €200,000 in your pension but since you received €80,000 (€16,000 x 5) in tax relief it only cost you €120,000 to get your pension to €200,000. For a self-employed person, the savings could be even greater as they may have to pay over 50% tax (PRSI/USC) on money drawn down from their company. They may have the option of putting in a company contribution of up to €200,000, which may have only been worth €100,000 in drawn down income.
Next month I can look at the options you would have with your €200,000 pension. Have a question? #JustCallOran on 087 6686624 or visit www.drumgoolebrokerage.ie