informed decisions blog

Pension Planning For Late-Starters – Blog 197

7th March 2022

Paddy Delaney

If you are heading towards retirement with zero pension planning done, this piece might help.

There is a lot going on at Informed Decisions HQ this week – so keeping this one short and sweet, focusing on a key aspect of pension planning for late-starters. I hope it might help you or indeed a loved-one.

The Importance Of Starting Pension Planning Early

Everyone talks about the value of starting pension planning from an early age. The logic being; if you start earlier, the money you invest in your pension will be invested for longer, and potentially benefit from the wonderfully positive impact of compound interest. If I told you that a pension saver invested €126k and got a final pot of €570k would you be impressed??

Here’s how long term compounding can help. A 25 year-old saving €500 per month into a pension, who achieves average yearly growth within their pension of 5%, has €570k in their pension at the age of 60. The wonderful thing about that is that 64% of the final pot was a result of compounding (€360k of the €570k). The total contributions paid was €210k, and assuming higher rate of income tax, net cost of the total contributions was €126k! A simple example but it paints the picture hopefully.

What If The Pension-Planning Ship Has Sailed??

OK OK, we all know that starting early in your pension planning is wonderful! But what if that ship has sailed for you? You are no longer in your 20, 30s of 40s? Say you are in your final years of working and have little to no pension planning done for yourself. You are starting to worry about the fact that you have no pension. Perhaps you think there is little to no point at this stage. Here’s a couple of ideas that might get you thinking about some potential advantages.

1.5 Times Final Salary Pension Planning

Chapter 7 of the Revenue’s Pensions Manual details a route that might appeal to you. In summary, if you are a member of a Occupational Pension Scheme you are be entitled to take a MAX of 1.5times your final year salary as a totally tax free lump sum from your pension, if you have 20 years of more service with your current employer by the time you retire/leave.

Here’s a example. You have just turned 57, and plan to retire at 60 from work. As of today you have worked with the company for 18 years – and you never bothered starting a pension (you silly person!). Do not panic, the pension planning ship has not fully sailed.

Here’s how; you join the company pension scheme. They may have one already and they might not even know it – or if there is none, one can be set up. Based on your age, Revenue allow you to personally contribute up to 35% of your Earnings (up to max earnings of €115kp/y) to the pension and get full tax relief on it. Therefore, if you are earning €80k per year, you can put up to 28k per year into the pension (at a net cost of only €16,800, but that benefit is secondary to the main point of this piece).

Your employer may also be open to make pension contributions for you, or indeed pay any potential bonus to your scheme instead of paying it out as taxable earnings. So, let’s say your employer also decides to contribute €5k per year. In total there is now €32,000 going into your pension, instead of being paid out to you as fully taxed earnings, plus you are getting tax relief on what you put in of course).

You do this for 3 full years. For simplicity we assume you achieved zero investment growth on the pension pot, or that the growth at least covered the fees you paid in the scheme over the course of the four years. So on your 60th birthday you have €96k in your pension pot. (€32k by 3 years). The great news here is….

Under Revenue rules, given that you have over 20 years’ service with your employer, have taken no other tax free lump sums from pensions, you can take every blessed cent of that €96k pension scheme totally tax free into your ‘hand’!


The rule is very clear, if you have 20 or more years’ service, you can take up to a maximum of 120/80ths (150% or 1.5times!) your salary as a totally tax free lump sum. Be warned though, if there is any surplus pot remaining you are obliged to use it to buy an annuity (which not many are fond of, at least at current rates!). Depending on the amount of surplus, you may be able to exercise a Trivial Pension lump sum, which we wrote about ‘decades’ ago in Blog 41 here.

In the above scenario, rather than take €28,000 salary plus €5k bonus as taxable cash each year (which would net down to c€48,000 after tax over the 3 years!). Instead you have horsed it all into pension scheme, and subsequently taken it all out totally tax free, and it was worth €96k!

Which, would you prefer; €48k income or a €96k lump sum (plus a reduction of €33,600 in tax over the final 3 years of work due to your contributions)??

What If I Will Have Less Than 20 Years Service?

Again, all is not lost if you have less than 20 years’ service!

Revenue allow the below amounts of tax free lump sums to be taken, depending on the number of years. Revenue also stress that this stands, provided that the aggregate of the value of non-pension retirement benefits in
respect of service with the current employer, and any retained benefits does not exceed 1.5
times final remuneration. So no other lump sums in other words.

  • 9 years = 30/80ths
  • 10 years = 36/80ths
  • 11 years = 42/80ths
  • 12 years = 48/80ths
  • 13 years = 54/80ths
  • 14 years = 63/80ths
  • 15 years = 72/80ths
  • 16 years = 81/80ths
  • 17 years = 90/80ths
  • 18 years = 99/80ths
  • 19 years – 108/80ths
  • 20 years or more = 120/80ths

In the above example, if you were only going to have say 13 years service when you retire, instead of contributing the maximum allowed, you might instead have decided to contribute the amount that would result in a €54k pension pot at 60 – and then decide to take that as a totally tax free lump sum. Simples!

All of the above of course assumes that you do actually take the tax free lump sum option, which we debated in recent Blog 171. That of course is a separate topic – what we are sharing today is a strategy that can and does help people to be very tax efficient in their planning as they get close to retiring or leaving their employment.

Please do share the ideas here with friends or loved-ones, it could be a great little earner for them!

I hope it helps.


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