Over 65s pay less Income Tax

We hear a lot of concern about funding our retirement but we sometimes forget that Ireland has a very benign income tax system for over 65s.  Later in life a number of valuable reliefs kick in:

  • Age Tax credit of €245 per person.
  • Income tax exemption of €18,000 pa for a single person and €36,000 pa for a married couple.
  • If income exceeds exemption limits marginal relief applies.
  • No USC on state pension.
  • A reduced rate of USC of 2% for the over 70s whose income (other than state pension) is less than €60,000 pa.
  • No PRSI in state pension, private pensions and annuities. No PRSI on ARF withdrawals over age 66.

The benefit of these reliefs was highlighted to us recently during a financial planning exercise for a long standing LHW client.  As they approached retirement they were alarmed to find they had only managed to save enough to replace about 40% of their GROSS income (before tax) in retirement.  However when we did our projections they were pleased to see their NET (after tax) income was closer to 60% of what they were currently living on.  We were able to illustrate this reducing tax cost in our lifetime cashflow projections and show they had enough to continue enjoying their current busy lifestyle.

 

Net Income Replaced

 

We thought it might be useful to set this effect out in a table (below).  Take an example of a married couple with one income.  Let’s assume they manage to replace exactly 50% of their gross income.  What they really need to know is what does this translate into in net income terms in retirement.  The difference between gross and net is quite stark:

Married Couple, One Income
Under 65
Gross Income €50,000 €80,000 €120,000
Income tax €10,002 €24,951 €45,751
Net Income €39,998 €55,049 €74,249
Over 65
50% of Gross Income to be replaced in retirement: €25,000 €40,000 €60,000
Income Tax €0 €1,740 €10,140
Net Income €25,000 €38,260 €49,860
Net Income Replaced 63% 70% 67%

So in other words clients who will have a retirement income of 50% of their gross will actually have between 63% and 70% of their net income thanks to the above tax breaks.  This effect is replicated to varying degrees across our married and single clients and regardless of 1 income or 2. Obviously this effect is dependent on the current tax system remaining the same.

 

Assumptions:

  • Maximum state pension of €461.30 per week inclusive of adult dependant.
  • Assumes 2% USC throughout.
  • No PRSI assumed.