When it comes to retirement planning, one myth refuses to go away: the idea that pensions are “just a tax deferral.” The thinking often goes like this:
“Sure, I get tax relief on my pension contributions now – but I’ll just pay it all back later when I draw down the pension. So what’s the point?”
Let’s unpack why this thinking is flawed – and why pensions remain one of the most powerful, tax-efficient wealth planning tools available. This is especially true for high earners and high-net-worth families.
What the Myth Gets Wrong
Yes, pensions involve tax relief today and taxation in retirement. But equating that to a mere deferral is a dramatic oversimplification. Here’s why:
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You Get Tax Relief at Your Marginal Rate
When you contribute to a pension, you receive income tax relief at your highest marginal rate i.e. up to 40%. This means for every €1,000 you contribute, it only “costs” you €600 after tax (or even less, depending on your rate). That’s an immediate, significant benefit.
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You Withdraw at a Lower Effective Tax Rate
When you eventually draw down your pension, particularly in retirement, your income is often lower. This means your withdrawals are taxed at a lower effective rate. You might contribute at 40% relief and withdraw at 20% – a clear win.
Add to that the fact that:
- You can take 25% of your pension tax-free (up to certain limits).
- You may structure your income to stay within lower bands.
- Post-retirement credits and allowances may further reduce your tax bill.
The upshot? You often pay less tax overall – not just the same amount, later.
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Decades of Tax-Free Growth
All growth within your pension fund – interest, dividends, capital gains – is free from tax while inside the wrapper. Over decades, this compounded tax-free growth is a game-changer, especially compared to investing in a taxable environment where gains are consistently shaved by income tax, DIRT, or CGT.
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Flexibility and Control in Retirement
With modern pension products like PRSAs and ARFs, you have considerable control over how and when you take your pension income. This allows for intelligent withdrawal strategies that optimise your personal tax position – something you simply don’t get with ordinary investment accounts.
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Estate Planning Advantages
For high-net-worth individuals, pensions can also play a strategic role in estate planning. ARFs, for example, can be inherited, and in some cases, passed to children with favourable tax treatment compared to other forms of inherited wealth.
The Bottom Line
Calling pensions “just a tax deferral” misses the point entirely. Yes, tax is involved at both ends – but the relief, growth, and planning opportunities in between offer a net tax advantage, not just a postponement of pain.
Smart pension planning isn’t about deferring tax – it’s about reducing it and building wealth efficiently.
Need Help Maximising Your Pension Strategy?
If you’re a high earner or high-net-worth individual in Ireland, understanding how to fully leverage pensions is key to preserving and growing your wealth. Contact us today to see how a bespoke retirement plan can work for you.
In Their Own Words
