Triple tax advantage – tax relief on contributions, tax-free growth, and tax-efficient benefits 

Tax relief on contributions

The Government offers tax relief on pension contribution to incentivize people to save adequately for retirement. Tax relief on pension contributions in Ireland is granted at your marginal (highest) rate of income tax, meaning you receive relief at either 20% or 40% depending on your tax bracket. Tax relief on pension contributions is provided at your marginal rate of income tax:​

• ​20% relief for those on the lower tax rate (€20 back for every €100 contributed)
• ​40% relief for higher rate taxpayers, typically earning over €40,000 annually (€40 back for every €100 contributed)​

​This means a higher rate taxpayer contributing €1,000 effectively only pays €600 out of pocket, as €400 is returned through tax relief – representing an immediate 66% return on investment.​

Additional Benefits:

• Not subject to USC or PRSI: Pension contributions reduce your income before these charges are applied, though tax relief itself only applies to income tax.
• Tax-free growth: Investment returns within pension funds grow completely tax-free, allowing for decades of compounding tax-free growth.
• Employer contributions: These are not treated as a taxable benefit-in-kind for employees, providing additional tax advantages.​

The annual overall limit for the amount of tax-relieved pension contributions across all arrangements—occupational pensions, PRSAs, and Retirement Annuity Contracts (RACs)—is set by your age and capped at the maximum net relevant earnings of €115,000 per year. The allowable percentage of earnings you can contribute for tax relief increases as you get older, and is as follows:​

• Less than age 30: 15%
• Age 30–39: 20%
• Age 40–49: 25%
• Age 50–54: 30%
• Age 55–59: 35%
• Age 60 and over: 40%

This limit applies to your combined personal contributions to all qualifying pension arrangements and is measured against total earned income each year, subject to the €115,000 cap. Any excess contributions may be carried forward for tax relief in future years, but always within the annual age- and earnings-related limits.

Example 1: 42-year-old earning €40,000

• Maximum tax-relievable contribution: 25% × €40,000 = €10,000
• ​At 40% tax rate, effective cost after relief: €6,000 for a €10,000 pension contribution

​Example 2: 32-year-old earning €80,000

• Maximum tax-relievable contribution: 20% × €80,000 = €16,000

​Example 3: 53-year-old earning €150,000

• Maximum tax-relievable contribution: 30% × €115,000 (earnings cap) = €34,500
• ​Earnings above €115,000 don’t count for tax relief purposes.

Certain professional sportspeople (footballers, rugby players, etc.) receive a higher limit of 30% of earnings for contributions made under age 50, recognizing their shorter career spans.

Employer Contributions

Employer contributions to occupational pension schemes or PRSAs receive even more favorable treatment:

• ​Not treated as a Benefit-in-Kind (BIK) for the employee.​
• Tax deductible as a business expense for the employer.
• ​Since January 2023, employers can make unlimited contributions to PRSAs without creating a BIK charge for employees, allowing employees to still make their own full contributions on top

Tax-Efficient Retirement Benefits

Tax-Free Lump Sum

Retirees can take a portion of their pension fund as a completely tax-free lump sum:

​Lifetime limits on tax-free lump sums:​

• First €200,000: Completely tax-free
• ​Next €300,000: Subject to standard rate income tax (20%)
• ​Any amount over €500,000: Subject to higher rate income tax (40%) plus USC​

For most people, taking up to €200,000 tax-free represents a significant benefit, as this amount would normally be heavily taxed if withdrawn from other investment vehicles.​

Income Tax Exemption for Low-Income Retirees

Retirees aged 65 and over are completely exempt from income tax (though not USC) where their total income in 2024 does not exceed:​

• €18,000 for a single person​
• €36,000 for a married couple/civil partners​

This means individuals receiving only the State Pension would pay no income tax on it. A married couple both receiving maximum State Pension Contributory (approximately €28,939 annually combined) could have additional income and still be entirely exempt from income tax and USC.​

Standard Fund Threshold Protection

While there are upper limits to prevent excessive tax-advantaged savings, these are set quite high:​

• Standard Fund Threshold: €2 million​
• Individuals can accumulate up to €2 million in pension benefits before a 40% tax charge applies to the excess​
• Some individuals obtained Personal Fund Thresholds higher than €2 million in earlier years​

Benefits over the threshold are subject to a 40% tax charge, but this still represents decades of tax-free growth on substantial sums

ARF Taxation Benefits

Approved Retirement Funds (ARFs) offer additional flexibility:​

• Imputed distribution rates as low as 4-6% annually depending on age​
• Funds remain invested and continue growing tax-free between withdrawals​
• On death, ARFs pass to beneficiaries (often with favorable tax treatment), unlike annuities which typically cease​

No Inheritance Tax on Spouse Transfers

ARFs and pension benefits can transfer to a surviving spouse without any income tax or CAT (Capital Acquisitions Tax). The spouse continues to benefit from tax-free growth until they make withdrawals.

Tax relief on the investment

All investment returns earned by Irish pension arrangements are completely exempt from:​

• Irish income tax
• DIRT (Deposit Interest Retention Tax)
• Exit tax on collective investment funds (normally 41%)
• Irish capital gains tax
• This is called “gross roll-up” because funds accumulate over time without any tax drag

Example: €10,000 invested for 25 years at 4% annual return:

• Tax-free pension fund: €26,658
• ​Taxed investment fund (4% less 41% exit tax = 2.36% net): €17,917
• ​Difference: The tax-free return is 49% higher after 25 years
• ​This demonstrates how tax-free compounding significantly accelerates wealth accumulation compared to taxable investments.

 An occupational pension scheme plus a PRSA/RAC

An employee can be a member of an occupational pension scheme and also have a Personal Retirement Savings Account (PRSA) at the same time. PRSAs are available to anyone, regardless of whether they are covered by an employer pension scheme. However, for employees who are already part of an occupational pension scheme—even if it’s only for death-in-service benefits—the main reasons to also contribute to a PRSA would be to make Additional Voluntary Contributions (AVCs) to top up your retirement benefits if the occupational pension scheme does not allow for AVCs and/or to make pension contributions from non non-pensionable employment. Income tax relief can be claimed on AVCs paid into a PRSA, subject to normal age-related and earnings limits.​

Employers who do not provide pensionable retirement benefits must offer employees access to a Standard PRSA; but even if your employer operates an occupational scheme, you can opt to have a PRSA—typically for flexibility or if the scheme does not allow AVCs or if you have income from non-pensionable employment. The amount of tax-relieved pension contributions across all arrangements (occupational pensions, PRSAs, RACs) is subject to an annual overall limit based on your age and relevant earnings. If you leave employment, you may also be eligible to transfer preserved benefits from an occupational pension scheme to a PRSA, subject to certain conditions.