Pension or the new investment account: where should your spare cash go?

Do you have spare cash sitting on deposit? If so, there’s a strong case for taking advantage of generous pension tax relief. But with a new Government-backed personal investment account set to open next July, are your spare savings better off going there instead?

Irish households had a whopping €175 billion sitting in low-interest bank accounts in the first six months of 2026, says the Central Bank. By leaving more than you need on deposit below the rate of inflation, the value of your money is shrinking. There are definitely better things to do with it.

Putting your spare cash towards an additional voluntary contribution (AVC) to your pension or into the new personal investment account (PIA) are both good ideas. But, before you move a cent, which is best for you?

Pension play

An AVC lets you add extra funds to your pension, topping up the regular contributions you and your employer make. Not only is this boosting your retirement savings, but you’ll get significant tax relief too.

“AVCs are among the most powerful, yet underutilised ways for Irish employees to build personal wealth,” says Niall O’Connor, founder of Financial Planning Matters.

The tax relief is most generous for higher earners. A single person earning €44,000 a year or more will benefit from 40 per cent tax relief on contributions.

Put €100 into your pension, for example, and the full €100 goes into your pot, where it can grow and compound tax-free, and the Government will give you €40 back. So, your €100 contribution costs you just €60.

Lower rate taxpayers get 20 per cent tax relief on contributions.

“You can effectively turn €6,000 of your own money into €10,000 invested towards retirement,” says O’Connor of higher rate taxpayers.

“This is a considerable advantage, before the investment has earned a single cent.”

It’s important to understand the age-related pension contribution limits within which you qualify for the tax relief.

If you’re aged 30 to 39, for example, you can contribute up to 20 per cent of your income and be eligible for the tax relief. This rises to 25 per cent for those aged 40 to 49, 30 per cent for those aged 50-54, jumping to 35 per cent for those aged up to 59 and 40 per cent for those aged over 60.

This is based on eligible earnings up to a ceiling of €115,000.

Importantly, the limits include your existing pension contributions. Take the example of a 40-year-old on €80,000 who already contributes 6 per cent of their salary to pension.

“The maximum personal contribution qualifying for tax relief would be €20,000,” says O’Connor. “Having already contributed €4,800, they could make an AVC of up to €15,200.”

They could contribute more, but they won’t get tax relief on anything over the 25 per cent limit for their age.

As a higher rate 40 per cent taxpayer, they make a tax saving at 40 per cent on their contribution so that €15,200 going into their pension only costs them €9,120. Revenue will give them a refund of €6,080, says O’Connor.

The upfront tax refund on an AVC is hard to beat, and your money can also benefit from tax-free investment growth within the pension as your money compounds in the years ahead.

If that €15,200 AVC remained invested over 25 years, assuming a 5 per cent annual investment return after charges, it could grow to approximately €51,500, says O’Connor.

Similarly, for someone aged 50 earning €100,000 who is already contributing 8 per cent of salary to their pension, their remaining personal contribution limit qualifying for relief would be 22 per cent of their salary, or €22,000.

After tax relief, contributing €22,000 to their pension only costs them €13,200.

Pension investments can go up or down of course but invested for 15 years at an illustrative 5 per cent annual return after charges, that single €22,000 contribution could grow to approximately €45,700, says O’Connor.

Money saved in a deposit account comes from your after-tax income, meaning you’ve already paid tax on those earnings and receive no additional tax relief for saving them, says Nick Charalambous, managing director of Alpha Wealth.

Keep €10,000 on deposit earning 2 per cent interest and it would generate just €134 a year once 33 per cent deposit interest tax is deducted.

With inflation running at 4 per cent, the cost of living is rising faster than the interest you are earning, so savings are actually losing purchasing power, says Charalambous.

“Watching your bank balance grow doesn’t necessarily mean you are building wealth.”

Having some accessible savings is essential of course. Don’t put your emergency fund or money for short-term goals into your pension.

“It makes little financial sense if you subsequently find yourself having to borrow at 7 or 8 per cent to fund another financial priority,” he says.

Personal investment account

Think of the Government’s new personal investment account as complementary to pension saving, not a replacement for it, says Charalambous.

Due to launch next July, you will be able to put up to €12,000 a year into the account, with a 1 per cent tax kicking in on any amount above the €50,000 tax-free threshold.

[ Ireland’s new personal investment accounts: Here’s how the scheme will workOpens in new window ]

Lodge the full €12,000 and, unlike a pension contribution, you will not get anything back now from Revenue by way of tax relief. Any gains will, however, be able to grow without capital gains tax, exit tax or dividend withholding tax.

How much could your money grow? As with a pension, there are no guarantees. The S&P 500, which tracks the top 500 listed US companies, has returned about 6-8 per cent on an inflation-adjusted basis every year over the past 20 years.

There have been periods of downturn, however, so if you need to cash in your investment when markets are down, you do face the risk of losing your money.

Both pension and the PIA can offer tax-efficient investment growth, says O’Connor, but the mechanisms differ.

Pension funds generally benefit from tax-free investment growth while your money remains within the pension, with taxes applied when benefits are taken.

Under the proposed PIA, there is no tax on investments under the €50,000 threshold but a 1 per cent annual charge would apply on any amount over that.

This could mean paying tax on the account in years when your investment is losing money, simply because the overall balance exceeds €50,000.

“For somebody paying 40 per cent income tax, with sufficient unused pension contribution capacity and money genuinely intended for retirement, I would generally examine the AVC opportunity first because of the immediate tax relief available,” says O’Connor.

But once you’ve got your pension on track, the PIA could provide an attractive additional vehicle for accumulating wealth outside the pension system, he says.

Revealed: Ireland's new personal investment account - so how will it work?

Listen |

25:11

Aideen Finnegan is joined by Dan Malone of Honest.ie for a debrief on the new personal investment account scheme unveiled by Finance Minister Simon Harris in Budget 2027. Dan explains it's a tax-advantaged “home” for investing in assets like stocks, funds, bonds and ETFs, with a €12,000 annual contribution cap and a €50,000 tax-free threshold. Once you go above that, a flat 1% tax rate kicks in on the portion above €50k. The bad news is that will happen even in years when markets fall and you lose money, with Dan warning that could meaningfully "drag on long-term returns." They discuss uncertainty around provider fees, whether accounts will be self-directed or offer pre-packaged options, and if it will be easy to move existing investments into the new account. Dan urges people not to wait until the planned July 1st 2027 launch to start investing, citing how long it took to get pension auto-enrolment off the ground.This episode is brought to you in association with Standard Life

Taxing times

Getting 40 per cent tax relief on pension contributions on the way in is great, but won’t I pay tax at 40 per cent when I take the money in retirement? Financial advisers get asked this all the time, says O’Connor.

It’s possible to get the 40 per cent income tax relief on your pension contribution and draw income from the pot in retirement without paying tax at the 40 per cent rate, says O’Connor.

Under current rules, you can generally draw down a quarter of your fund at retirement as a tax-free lump sum. The first €200,000 of qualifying retirement lump sums received over an individual’s lifetime is free of income tax. The next €300,000 is generally taxed at 20 per cent, he says.

The income tax rate you pay after that depends on how much you draw down from your fund each year.

Take a single retiree aged 66 who has €500,000 invested in an approved retirement fund (ARF) and is getting the maximum State pension, equivalent to about €15,564 a year.

If they withdraw 4 per cent of the ARF annually, or €20,000, this gives them a total retirement income of €35,564. That is below the €44,000 threshold this year for higher-rate income tax, says O’Connor. That threshold rises next year to €46,500.

Even someone with a €700,000 ARF who is withdrawing 4 per cent annually, or €28,000 a year when combined with the State pension, would have approximately €43,564 a year, still below the threshold for higher income tax.

These figures do assume the person has no other sources of taxable retirement income, such as a separate defined benefit or foreign pension, rental income or other investment withdrawals, he says.

[ Biggest difference to your pension pot is not how much money you put inOpens in new window ]

Accessibility

Another big difference when choosing between the AVC and the PIA for spare cash is accessibility, says Charalambous.

“The PIA’s main attraction is greater flexibility, allowing people to invest for medium- to long-term goals, without having to wait until retirement to access their money,” he says.

This will make it more attractive to those wanting to accumulate wealth for things other than retirement.

The fact that an investment receives favourable tax treatment does not automatically make it right for you.

“I would never recommend transferring all available cash into a pension simply to generate a tax refund,” says O’Connor.

[ How big should your pension pot be for a comfortable retirement in Ireland?Opens in new window ]

Before deciding what to do, identify three categories of money, he says: what you need available in the short term; what should be invested for medium- and long-term objectives; and what can be committed to retirement.

The PIA may become an attractive option for the second category, while AVCs can be particularly powerful for the third.

[ I need help tracking down a lost pension from my first job nearly 50 years agoOpens in new window ]

Use it or lose it

If you do have spare cash and you haven’t yet maxed out your pension contributions, don’t wait for the PIA to launch before acting, says Charalambous.

Pension tax relief is linked to the year – so use it or lose it.

“The mistake is missing an opportunity to claim valuable pension tax relief now while waiting for a scheme that hasn’t launched yet,” he says.

To claim tax relief against your earnings for last year (2025), an AVC must be made by October 31st of the current year.

There is an extended deadline of November 18th for Revenue Online Service (ROS) users such as those self-employed or tax agents handling self-assessed income tax.

“I would strongly encourage people to review their pension before the tax deadline. The tax advantages are simply too valuable to overlook,” says Charalambous.

You’ll need to act fast to claim pension relief against your 2025 earnings.

To make an AVC, first check how much unused personal pension contribution capacity remains for 2025, says O’Connor. Payroll or your pension provider should be able to tell you this.

Call Revenue and ask about your actual income tax position for 2025. Not everyone will qualify for 40 per cent tax relief on every euro contributed, even if they are generally considered a higher-rate taxpayer, he says.

Third, confirm you have sufficient cash to fund the contribution in the short term before any refund is received.

Fourth, think about how you want the pension AVC to be invested – in the same way as your payroll contributions or differently?

Making the contribution involves filling out a form, available through your pension provider’s website and a clearly labelled bank transfer to your pension provider’s account number on the form.

[ Pensions: In pursuit of financial security ... although chilly reality awaitsOpens in new window ]

Choice

Any Government initiative to encourage Irish people to invest more rather than to continue stockpiling cash on deposit is a good thing but think of AVCs and PIAs as apples and oranges. They serve two different purposes.

But provided you have enough accessible funds to serve your short-term needs, either option is preferable to holding your wealth in cash deposits, says O’Connor.

For a lot of taxpayers, in the long term, it will probably be more tax efficient to maximise tax relief on pension contributions before contributing to an investment account.

“But for someone who has already maximised their pension contributions, or who wants to build investments they can access before retirement, it could be an attractive addition to their financial plan,” says Charalambous.