If you’re reading this, you’re probably thinking how does a company pension plan work?

It’s a pension plan supplied by an employer for employees, and it has quite a few perks.

There are two types of company pensions – defined benefit and defined contribution. A defined benefit pension plan establishes the figure that will be paid on retirement based on a person’s salary and the number of years in the plan.

The second option, which is much more common, is a defined contribution plan. Here, you pay a set amount into your pension each month and usually, your employer makes a regular fixed contribution. You’ll get income tax relief on what you pay in – though revenue does limit the amount that you can get tax relief on (see visual below for details) – and the final amount in your pension pot varies depending on how long you’ve been paying into your pension, the rate of growth your pension achieves and how much you and your employer contribute.

As they are the most common type of group pension, let’s find out more about defined contribution company pensions. Alternatively, if you are a member of a defined benefit plan, you can talk to your financial broker or advisor, plan sponsor or plan trustee(s) for more information.

How does a company pension plan work?                              

A defined contribution company pension, or an occupational pension, is set up by an employer. Employees usually pay in a set portion of their salary, and this can be increased at any stage. The idea is to build up a fund to give you the amount you need to live on in retirement.

In a company pension, employers usually make contributions on behalf of their employees. This is an advantage which makes company pensions an appealing prospect for many.

Illustration depicting pension contributions
Illustration depicting pension contributions

Do my pension contributions save tax?

Yes, you can get income tax relief on the contributions you make to your company pension at your highest rate of tax though income tax relief is not guaranteed. As a rule, the older you get, the more you can put away into your retirement fund with income tax relief – which might just suit your income growth. So it makes sense to make the most of the generous tax benefits as you go.

For example, someone aged 32 could put 20% of their annual income into their pension and save tax but if aged over 50, the limit rises to 30%. 

These limits exclude the contributions your employer makes on your behalf. The maximum salary amount that can be used for income tax relief purposes is €115,000. If a person doesn’t pay income tax, they do not qualify for income tax relief. No tax relief is available from PRSI or the Universal Social Charge (USC). To be eligible to claim income tax relief, your income must be taxable either Schedule E or Schedule D (case I or II).

To claim your income tax relief, you can apply to your Inspector of Taxes to adjust your tax credits. Pension payments deducted from salary will receive immediate tax relief. The self-employed must include pension contributions in their self-assessment tax returns in order to obtain income tax relief.

Can I cash in my company pension?

You only have access to your company pension when you retire. Generally, company pensions are designed to be drawn down when you retire. In Ireland, 65 is the average retirement age. However, you may be able to access your pension from the age of 50 in certain cases if you are no longer working for your employer and the trustees and employer agree to this. You may also be able to early retire at any time if you are in ill health and unable ever to return to work.

It’s important to remember that if you access your pension early, the funds may not be as high as they would be if you waited until the Normal Retirement Age (NRA).

Warning: if you invest in this product you will not have any access to your money until age 60 and/or retire

Is my company pension taxable?

While income tax relief may be available on contributions on the way into a pension, the benefits from your pension, like all other income is subject to income tax, Universal Social Charge and PRSI, if applicable. However, there are often major tax benefits to pensions. In a defined contribution plan, you may take a lump sum of up to 25% of your pension fund at retirement.

Your lump sum can also be calculated on the length of your service and salary with your employer. But it’s worth noting that if you opt for this kind of lump sum benefit, it means you have to use the rest of your fund to purchase an annuity or pension for life as it’s sometimes known.

Depending on the amount of the lump sum, some of it may be tax-free and the remainder subject to tax. Since 7th December 2005, there has been a lifetime limit of €200,000 relating to tax-free sums from pension plans.

What happens to my pension when I leave a company before retiring? 

You have a few options:

  1. Leave it in the old pension scheme. When you retire, you will get the benefits anyway.
  2. You can move it into the pension scheme in your new job.
  3. You can move it into a special pension account in your own name such as a Personal Retirement Savings Account or a Personal Retirement Bond (PRB), sometimes called a Buyout Bond.

It all depends on what option is the best for you personally but if you’re not sure how to proceed, it’s worth speaking to a Financial Advisor. Fill out the form at the bottom of this page and one of our friendly advisors will get in touch.

How much do I need to retire in Ireland?

Ireland is not a cheap place so to live comfortably, you’re going to need a substantial amount in your pension pot. In fact, Numbeo, a database which calculates the cost of living for different countries, estimates that Ireland is the 13th most expensive place in the world to live.

You want your pension pot to be as healthy as possible and our budget planner can help determine how much you need to live on when you retire.

What will my company pension be worth?

For a defined contribution pension the value of your pension will depends on how much you and your employer contribute, the rate of growth your pension fund achieves which is affected by how it is invested, and how early you start. If you have a defined benefit plan, your benefit is based on your years of service, your salary and the plan solvency.

This useful pension calculator tool can help you figure out how much and how often to contribute to your pension pot so that you can reach the end goal – the amount you need to live on in retirement.

Whether you’re starting your pension or want to know how to maximise it, Irish Life can help.

Learn more about how to make the most of your company pension and chat with a financial advisor today.

Warning: If you invest in this product you may lose some or all of the money you invest.

Warning: The value of your investment may go down as well as up.

Warning: The income you get from this investment may go down as well as up.

Booking a call with Allied Financial, there is no obligation to buy anything after the call. It’s just a conversation about your finances, Call 096 60044

Written by Irish Life Assurance published in April 2024