After spending decades working, have now retired and you are drawing down your pension. During all those years working, your employer always looked after your income tax. You got a payslip each month with the gross payment, a load of deductions and the net pay in the bottom right corner. This always equalled the money that went into your bank account. But now you’re retired, what happens now? Who is going to make sure you are paying the right tax? Don’t worry, when you retire, you will get even better tax breaks than when you were working.
Whether you have purchased an annuity or invested in the ARF, you will be drawing an income in retirement and this income is taxable under the PAYE system, just like when you were an employee. The insurance company that holds your money will in effect become your employer in retirement.
When you set up your policy with them, they will provide you with their Employer Tax Reference number. You ring the Revenue and let them know you have retired and who your pension is with, quoted the tax reference number. They will then assign your tax credits to that company. If you don’t, you will be taxed at the higher rate (emergency tax as it used to be known) The insurance company will process your income just like when you were an employee. You will even get payslips and a P60 each year.
As your pension income is taxed under the PAYE system, it is liable to income tax, under the same brackets as before. The standard rate (20%) bands are:
The remainder is taxed at 40%.
If you are in receipt of the State pension, this is also liable to income tax. There is an income tax exemption to those receiving less than €18,000 a year and the State pension is included in this amount. This means if the State pension is your only source of income, you won’t have to pay income tax.
At age 65, you will get a bit of a tax break in the form of the age credit, which amounts to €245 per person, so for a married couple you will get €490 a year.
There are different rules on paying PRSI depending on the source of your pension income. You don’t have to pay PRSI on the State pension, private pension schemes or on annuities. But if your income comes from an ARF or AMRF, you will have to pay PRSI on this income up to age 66.
Again, there is no USC on the State pension. So if the State pension is your only source of income, you will not pay any income tax, PRSI or USC.
Otherwise, you will have to pay USC on your income at the normal rates. There is a reduction of 2% for over 70’s whose retirement income is less than €60,000 (not including the State pension).
With the State pension currently at €12,652 a year, retirees are saving at least €579 a year in PRSI and USC deductions alone.
As you get older, your get more tax benefits as when you were working. You will also have an insurance company looking after the payroll for you into your old age, so there is nothing to worry about.
If you have any questions, send me an email at steven@bluewaterfp.ie