The follow is an extract from a Sunday Independent feature on Sunday 25 March 2018, in which John Byrne a partner in our tax department, answered readers’ questions on tax matters. Read the full article here.
Question: I have two pensions: one from my previous job as an employee – which has a sum of €454,000 in it; the other a Personal Retirement Savings Account (PRSA) with €300,000 in it as I’ve been self-employed since 2000. If I draw down my pension from my employed work, can I continue to make tax savings by investing in my PRSA as I continue to earn. Michael, Naas, Co Kildare
Answer: Depending on your age and the employer pension scheme rules, you may be able to draw down your employer pension scheme and continue as self-employed and fund a PRSA.
The maximum lifetime threshold which you can fund through all your pension schemes is €2m over your lifetime. (In other words, the maximum pension fund on which you can get tax relief on over your lifetime is €2m). You may be able to take part of the funds as a tax-free lump sum – up to a maximum tax-free lump sum of €200,000 in your lifetime. The next €300,000 is taxed at 20pc.
Normally an employer pension scheme is available to be drawn down by you between the age of 60 and 70 years. However, you should refer to your own scheme booklet to find out when your pension is available to you.
At retirement, you have three options: take part of the funds as a tax-free lump sum and part of them as taxable; buy an annuity – that is, a guaranteed income stream for life; or transfer the balance of the funds to an approved retirement fund (ARF – a personal retirement fund).
If you have drawn from your former employer scheme, but have a separate self-employed income which meets the requirements for pension purposes, you may continue to fund a PRSA. Benefits normally can be taken between the age of 60 and 75. While you may continue to fund your PRSA, it’s important that you review the lifetime limits for pensions and tax-free lump sums as these apply to your total pension pot. PRSA contributions may be made in relation to your current year’s earnings and also backdated for 2017 – prior to filing your tax return in October/November 2018.