This article is relevant to ATX-IRL candidates and is based on the legislation in force as at 30 September 2021, for the 2022 exams (which is unchanged from the legislation as at 30 September 2020, for the 2021 exams).

The boat

A few years ago, a letter landed on my doormat. My employers from a previous role were transferring my occupational pension to another fund manager.

Honestly, I wasn’t overly interested. The husband, however, was extremely excited. He enjoys reading the small print and noted quickly that the early retirement age on this fund was age 50. What did this mean? It meant that in a year’s time I could access a tax-free lump sum from said pension.

And that is exactly what we did. With my tax-free lump sum, my husband got himself a very nice boat for cruising down on the Shannon. He says it’s ‘our’ boat but I’m under no illusion. It‘s definitely his boat.

So how did all this come to fruition?

Well, let’s start at the basics. There are three types of pension: state pension; personal pension and occupational pension.

Type one – state pension

  • State pension (contributory) which is payable at age 66 to people who have satisfied certain PRSI conditions, and
  • State pension (non-contributory). This is a means tested pension for people aged 66 or over and who do not qualify for the retirement pension or contributory state pension.

Whilst both of these are fairly generous by an EU standard, they might not get you your boat on the Shannon.

Type two – personal pension (retirement annuity contract/(PRSA))

This is the type of pension contributed to by sole traders or employees who don’t have access to an occupational pension scheme.

Type three – occupational pension

This is company pension scheme set up by your employer. Both the employer and employee can contribute towards this pension.

Included under the occupational pension heading is the small, self-administered pension, (SSAP). Such pension schemes have 12 or fewer members, and often contain just a single member. The advantages of these occupational schemes include flexibility and the member retaining control of the investment management of the fund. However, the drawbacks include investment restrictions and costly compliance requirements. A detailed discussion of SSAP’s is beyond the scope of this article.

Your pension contributions and tax

No doubt you will have heard that making a pension contribution is very tax efficient. That is true. However, the degree of tax efficiency depends on the type of pension.



Sole trader/employer (personal pension)

Employer pays on behalf of employee (occupational pension)

What element of pension contribution is tax deductible?


Individual tax-payer will save income tax but this is restricted to an age related percentage of net relevant earnings (NRE – see below).


Employer will get full* tax deduction against their taxable trading profits for all pension premiums paid on behalf of their employees.

No restriction but it must be the amount that was actually paid and not just accrued for.



It doesn’t relieve PRSI or universal social charge (USC)

This is not treated as a Benefit in Kind for the employee.

* Employer can fund to provide a maximum pension of 2/3 final salary on retirement of employee and it is on this amount that tax relief is given

Personal pension

Firstly, let’s explain net relevant earnings (NRE). Broadly, it is earnings from a self-employed trade or profession.1 In addition, it can also be income from a non-pensionable employmen – ie earnings from a job that are not being pensioned in a company pension plan. (If you are included in a company pension plan only for a lump sum death-in-service benefit you are deemed to be in non-pensionable employment and to have relevant earnings for the purposes of this type of pension).

It is worth knowing that dividend or rental income is not considered to be NRE, and therefore any pension contribution with this type of 'passive' income will not qualify for a pension tax relief. It is also worth knowing that the age-related percentage means that the older you are, the more of tax relief you will get in relation to a pension contribution as follows:

Age-related percentage
% of NRE

You should note that NRE is capped at €115,000 and also the pension contribution won’t relieve USC or PRSI. Let’s take a look at a few examples.

My self-employed income is €55,000 and I’m 40 years old. I invest €15,000 into personal pension. How much is tax deductible?

€55,000 x 25% = €13,750.

But you have to remember that this relieves income tax only. So the saving to me is only €13,750 at 40% = €5,500.

But I want to invest €15,000, so what happens to the excess that is contributed above my limit of €13,750 – ie the €1,250? This has to be carried forward and the tax relief would apply the following year, provided I still qualify under the age related percentage rules the following year.

My self-employed income is €160,000 (remember the NRE limit is capped at €115,000). I am 50 years old and I invest €48,000 into personal pension. How much is tax deductible?

€115,000 (remember it is capped) x 30% = €34,500

This relieves income tax only, so the saving to me is only €34,500 at 40% = €13,800.

What happens to the unrelieved element of the pension contribution €13,500? (difference between €48,000 and €34,500). Again, this is carried forward and tax relief would apply the following year, as long as I qualify under the age related percentage rules.

The moral of the story here is that if I’m fortunate enough to be able to afford to contribute a sizeable amount into my personal pension, not all of this sizeable contribution would attract tax relief. This is quite restrictive because it only relieves income tax, there is a cap on the NRE and there is an age-related percentage restriction.

Now on to the exciting bit.

The occupational pension

When an employer contributes to a pension on your behalf, the business gets a full tax deduction. There are no age-related percentage restrictions, nor is there a NRE cap on their contribution. Similarly, the employee is NOT treated as receiving a benefit in kind, so no taxation for them. Fabulous. (Note however, that any employee contributions are treated with the same restrictions as if the employee was contributing to a personal pension as above).

That is the contributions dealt with. What happens when you get to retirement age?

The drawdown on retirement age

For the personal pension, at retirement a lump sum can be accessed but this is restricted to 25% of the value of the fund. The remainder 75% can be invested into an approved retirement fund (ARF)/approved minimum retirement fund (AMRF) or an annuity.

However, for the defined contribution occupational pension scheme, there are two options:

  • Option 1: Up to 1.5 times your final salary can be accessed as a lump sum. The remainder must then be invested in an annuity.
  • Option 2: A 25% lump sum with the 75% remainder invested into an ARF/AMRF or an annuity.

In all options the tax-free element of the lump sum is restricted to €200,000. The second €300,000 is taxed at 20% and the remainder at 40%.

My final salary is €120,000, and I have 20 years’ service. The pension provider informs me that my pension fund is worth €180,000 at the time of my retirement.

Option 1: Lump sum 1.5 times’ salary plus annuity

The 1.5 times final salary option is only available within an occupational pension scheme. The lump sum available is 1.5 times €120,000 (final salary) = €180,000. Therefore, there is no need to purchase an annuity. THE ENTIRE DRAWDOWN IS TAX FREE as it is under the €200,000 limit.

Option 2: 25% route plus an ARF/AMRF

This is the only option available for a personal pension and is an option for an occupational pension.

I would be entitled to a lump sum of 25% x 180,000 (pension value at date of retirement) = €45,000 plus ARF/AMRF fund of €135,000 with the difference (€180k – €45k).

With this option, I would have access to a significantly smaller tax-free lump sum.

The jargon

You may be wondering what the difference is between annuity, an ARF and a ARMF is.

An annuity is the opposite of a life insurance policy. You invest a lump sum, and it pays out a fixed regular income for rest of your life. Generally, it dies with you (or your spouse). If interest rates are low, as they are now, the resultant pension will be low. This makes it an unpopular product at present.

An ARF has potential to grow/decrease in value. An ARF gives you control over types of fund to invest in. Instead of automatic income, you withdraw when you need it.

Income from both an annuity and an ARF are taxed under PAYE when you withdraw, (there is a deemed withdrawal of 4% per annum on ARF after aged 60).

An AMRF is more restrictive than an ARF as you can only withdraw a maximum of 4% each year until you reach age 75. At age 75, or earlier if you meet the below criteria, you can convert your AMRF to an ARF. Revenue rules require you to set up an AMRF unless one of the following statements applies to you:

  • You have a guaranteed income payable for life (for example, State Pension or other annuity income) of more than €12,700 per year
  • You already have an AMRF with an investment amount of at least €63,500
  • You are older than 75

Hopefully you can spot that the ‘golden child’ between the annuity, ARF and AMRF is the ARF!

In conclusion, an occupational pension scheme gives access to a potentially higher tax free-lump sum as well as being potentially more tax efficient when the initial contributions are being made. However, you may be forced to invest in an annuity rather than an ARF.

Happy boating!

(1) Net relevant earnings = earnings from trades, professions and non-pensionable employment after deducting capital allowances, losses and charges (to the extent that they exceed non-trade income).

Written by Paula Byrne, an ATX-IRL lecturer for Griffith College and the author of the recognised study text for TX-IRL and ATX-IRL