Pension fund contributions help workers defer today's tax liabilities until retirement, writes Laura Slattery.

'Got your pension sorted? That's a tax relief" is a marketing slogan for a big bank currently adorning double decker buses. But it may be a slightly enigmatic statement for the seven in 10 people who, according to a recent survey by a rival big bank, don't understand the tax relief on pension contributions.

The results did not go into detail about whether these survey victims did not know that tax relief exists, did not know how much it is worth to them or just did not care either way.

With the financial services industry's seasonal campaign to get people to sign up to a pension in full flow, and the Pensions Board making regular attempts to spice up pensions, the widespread state of blissful ignorance about pensions and their wonderful way they help people slash the amount of tax they pay is under threat.

"Traditionally, a glazed look comes down when you mention the word pensions and people think 'oh my financial adviser is just trying to sell me stuff'," says Brian Culliton, a qualified financial adviser (QFA) who is at the moment very busy selling "stuff".

October 31st is a scary date for reasons that have nothing to do with the pumpkin and witch-fest that is Hallowe'en. It is also the date by which self-assessed taxpayers must file their 2005 tax return, pay the balance of their tax liability for 2005 and, as if that wasn't bad enough, pay their preliminary tax liability for this year.

This means that tax advisers, QFAs and accountants are all as busy as fancy dress hire companies at this time of year. The Hallowe'en deadline, however, is not the absolute cut-off it used to be: people who pay and file using the Revenue Online Service (Ros) have an extension until November 16th and around two-thirds of self-employed people make use of this extra time.

The tax deadlines mostly affect self-employed people. PAYE employees who don't have any non-PAYE income - such as rental income - often have no need to file a tax return. But this means they often forget to assess whether or not they can afford to pour any spare cash into sound investments that could produce good returns and, crucially, save on tax.

"Before the deadline, PAYE employees can make a pension contribution for last year and get a rebate on tax for that year," explains Culliton, who is director of Foresthill Financial Planning, which is based in Citywest in Dublin.

The tax relief on pensions is available at the higher rate of tax that workers pay.

For someone who only pays tax at the standard rate of 20 per cent, a contribution of €100 to a pension effectively only costs them €74, because they will have "saved" the 20 per cent tax (€20) due on their earnings of €100 and they will also receive relief from PRSI at 4 per cent and the health levy at 2 per cent.

The tax breaks on pensions are even more valuable for people who pay tax at the higher rate of 42 per cent, which applies to earnings over €32,000 (or €29,400 if the contribution is being made in respect of the 2005 tax year). For these people, a pension contribution of €100 has a net cost of just €52, if the PRSI and health levy relief is taken into account.

For self-employed people, however, making a pension contribution before the income tax deadline will result in an immediate "double" tax saving, according to Culliton.

Not only will they be able to reduce their tax liability for 2005 by backdating a lump sum pension contribution to that year and reducing their assessable income, but they can reduce the amount of preliminary tax they pay for 2006.

This is because preliminary tax payments must be at least 90 per cent of the estimated tax liability for the current year or 100 per cent of last year's liability. Most people choose the latter option, because it avoids the risk of underestimating the tax liability and having to pay the Revenue interest.

Essentially all tax-efficient investments involve spending money in order to save money, which is nice only if you can afford it. Not everyone will want to tie up their cash until retirement even if it means saving on the amount of money they have to hand over to the Exchequer. And pensions are not entirely tax-free: the retirement benefit will be subject to income tax.

But Irish pensions legislation is the envy of Europe, Culliton says. "Tax paid is gone forever. With pensions you can defer the tax liability for a long time," he says.

Last year, the Government introduced a cap on the total pension fund people can accumulate but at an index-linked €5 million, this is a very generous limit, Culliton notes, especially compared to the £1.5 million cap that applies in the UK.

To help people who are nearing retirement, the Government has increased the maximum percentage of earnings that people aged 55 and over can contribute to a pension in a tax-deductible way (see panel). Before this year, the maximum percentage was 30 per cent, with lower limits for younger contributors.

For example, a 40-something with assessable earnings (after allowances) of €60,000 can make a lump sum contribution of €15,000 to a pension and reduce his or her assessable income to €45,000 for tax purposes. A 60-year-old earning the same amount can contribute up to €24,000 and reduce his or her assessable income to €36,000.

The pensions industry has expanded significantly in recent years, with increasingly complex schemes on offer, such as small self-administered pensions (SSAPs), which are aimed at company directors and are designed to allow people to use their pension funds to borrow or "gear up" so they can invest in property.

With the phasing out of old Section 23-style tax reliefs on property investment, being able to invest in property tax-efficiently through a pension has become more important.

The group of people who can borrow to buy property using a pension fund has now widened following the introduction of Standard Life's Synergy pension product. "It increases the access to mid-table individuals as opposed to just high net worth people," says Culliton.

Other life assurers are likely to copy the product, which works by allowing an individual or a group of up to six individuals to select an Irish or UK property in which to invest using their pooled pension funds. This is then bought and managed by Standard Life on their behalf.

The tax saving for an individual buying a €1 million property using a pension fund of €250,000 and additional borrowings is over €30,000 in the first year, based on the person paying tax at the top rate of 42 per cent, according to Standard Life.

An alternative option is a pension mortgage, where the term of an interest-only loan is timed to expire with the expected date of the holder's retirement. Instead of repaying the lender the main capital, the owner pays premiums into a personal pension plan, thus qualifying for tax relief. At the end of the policy, the pension fund should be enough to clear the mortgage - although this is not guaranteed.

Meanwhile, there are still some capital allowances schemes around that will help investors with large rent books shelter their rental income.

However, from 2007 high net worth individuals won't be able to use these schemes to offset liabilities to nothing.

"Everyone has one eye on it at this stage," says Jim Kelly, tax director at accountancy firm Grant Thornton. Politically, what is being said is that it is not acceptable for people to pay zero tax."