Can I reduce my tax bill by making a pension contribution?

Yes. A pension contribution is one of the most effective ways of reducing your income tax liability and at the same time providing income for your retirement.

As can be seen in table 1 below, the tax and PRSI reliefs available for investing in your pension are extremely generous with the Government effectively contributing up to €470 of every €1,000 invested in your Pension fund.

Tax relief available for a €1,000 Pension fund contribution

*PRSI relief varies depending on your income and your employment status.

What are the maximum pension contributions that qualify for tax relief?

The limits are generally determined by your age and income levels.

For example, an individual aged 38 on a salary of €60,000 can make a pension contribution of up to €12,000 in 2008, i.e. 20% of his taxable earnings, and reduce his/her tax bill by up to €5,000. More generous limits are available if you own your own company.

But is now a good time to be investing in managed pension funds?

Although the return that managed pension funds have achieved over the last 10 years has disappointed investors, the tax and PRSI reliefs available for investing in your pension are extremely generous and should not be ignored.

The key to managing risk is to diversify your investments, and if you are close to retirement, a large number of pension providers are now offering cash funds, which are secure and offer attractive tax-free returns. For individuals with 15+ years to retirement, the return on managed funds has historically averaged in excess of 8% and this includes periods of stock market highs and lows. In fact, it would be true to say that for the ordinary high rate taxpayer, placing your savings for retirement purposes within your pension fund almost doubles your money, day 1. No other tax shelter even comes close.