Medical Consultants: Should I make a pension contribution this year?

It is that time of year again – tax time. We are approaching the deadline for filing tax returns for income earned in 2019. The tax return will reconcile any tax paid during 2019 in the form of preliminary tax with the final total amount due based on the tax return. Any surplus will be refunded and any shortfall will mean that the balance of tax owed for 2019 has to be paid.

It is at this point in time that the question of making a pension contribution in order to reduce the tax bill comes on to the table. As you will see from your monthly payroll slip, we do not live in a low tax country when it comes to income tax. A very important area where Revenue will allow us to lower the taxes that we pay is through pension funding. We are being incentivised to save for our retirement. A pension is basically a tax efficient way of saving.  A personal contribution into a pension qualifies for tax relief at the higher rate (40%) although not relief from PRSI or USC. This can have a big impact on a tax bill.

For example, let us say that after filing a return, there is €30,000 in taxes outstanding for 2019. However, if you were to make an accompanying personal pension contribution of €20,000, it would lower the tax bill by €8,000 (€20,000 @ 40%) as well as potentially having the same impact in preliminary tax.

Unfortunately, tax relief is restricted to an age and earnings limit (see below) with the maximum allowable earnings for this calculation being €115,000.

For age-related earnings percentage limits please see…

https://www.revenue.ie/en/jobs-and-pensions/pensions/tax-relief-for-pension-contributions.aspx

In the case of a Medical Consultant with HSE and self-employed income, they must firstly use up their allowances based on their HSE income. This will mean that most Medical Consultants (unless working part time) would have to fund an AVC PRSA based on their HSE earnings.

However, there is another factor that needs to be taken into account for HSE Consultants. That is the defined benefit pension that will be drawn down in retirement.  In Ireland, there is currently a funding cap on pensions of €2m (the so-called standard fund threshold). This applies to both private pensions (both defined contribution and defined benefit) and also public sector pensions. For Medical Consultants who often hold both private and HSE pensions, the combined value of both pensions is taken into account (a capital value calculation of the HSE pension would be completed at retirement to determine its value). If a Consultant’s total pensions exceed this €2m threshold, they are subject to a higher rate of tax on the surplus (this will be discussed in more detail in a future blog post).

While tax relief is granted on the funds when they are contributed to a pension, there is potential for the funds being contributed to be double taxed (once as income when withdrawn from the pension and a second excess tax of 40%).

Therefore, before continuing to fund a pension, it is important to have a rough estimate of the capital value of your pension at retirement. While this is based on inputs such as salary which are going to change over time, a rough approximation of the value of the HSE pension at retirement will shed some light on this question.

Should you have any questions on this, please do not hesitate to get in touch.

We have also written 3 white papers related to pension/financial planning for Medical Consultants.

  • White Paper for Medical Consultants with Public and Private Income
  • White Paper for Medical Consultants employed after 1st October 2012
  • White Paper for Private-Only Medical Consultants

Please contact me at hughgallagher@pfp.ie and I will send you on a copy.

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