The advantages of a pension plan over a savings plan are the tax relief allowed up front on the amount of the contributions; pension plans grow tax-free and the tax free lump sum at retirement. However, the Government has significantly squeezed the tax efficiency of personal pension contributions in recent years.

These restrictions include a reduction in the amount of salary that can be pensioned from €254,000 to €115,000 and the dis-allowance of personal contributions for USC and PRSI. Accumulating pension funds are the subject of a pensions levy for the past four years and that levy will again apply in 2015 at a rate of 0.15%.

The benefits have been hit with the introduction of USC on pension payments; income tax bands and tax credits have been reduced and a total lifetime limit of €200,000 on tax free cash has been introduced since 7 December 2005. Sums above this amount will be taxed. In addition, pension plans suffer from a lack of access.

In terms of tax efficiency of pension contributions, there are broadly three categories.

  1. Pension contributions look to be significantly more tax-efficient and beneficial to the saver than a savings plan where the retirement benefits will be largely or fully tax free or where an employer matches a personal contribution.
  2. Pension contribution look to be more tax-efficient than saving a net amount in a savings plan. People in this category include higher rate tax payers, where their State Pension and other income will largely use up their income tax exemptions in retirement; higher and standard rate tax payers within 10 years of retirement and where the lump sum will be partially or fully taxed at the standard rate.
  3. Saving a net amount into a savings plan looks to be more tax efficient than a gross pension contribution for standard rate taxpayers whose State Pension and other income will largely use up their income tax limit in retirement.

Before taking any action, individuals should take professional pension advice to see what is best for them.