Planning for your retirement
Pensions and what they’re all about
The mere thought of pensions is enough to send the average person running; however a pension is your income in retirement, providing the finances to fund your life when you have retired. Increased levels of longevity and standards of living mean that retirement is becoming more costly than ever before. The majority of people believe that the current State pension of €230 per week wouldn’t be enough to meet all their needs in retirement.
Pensions are long term investments
It is important to acknowledge that pensions are by their very nature a long-term investment. Over the lifetime of a pension, which could be thirty to forty years, there will be times of high returns as well as low returns. This is to be expected with all investments and pensions are no different. For those who have started planning for retirement and are investing in a pension it is important to have an understanding as to the investment choices and risks being made.
The Tax Relief
One of the more immediate benefits of contributing to a pension is the tax relief. This relief proves pensions to be one of the most tax efficient ways of saving for the future.
As mentioned, on average people are living longer and it is expected that this trend will continue into the future. It is estimated that on average a person retiring at 65 years now can expect to live for a further 20 – 23 years and many of us live far longer. In order to incentivise you, as you get older, to allocate more of your income towards retirement the percentage limits of your salary which can be invested in a pension and receive tax relief are increased – please see the table below. Currently you receive tax relief at your highest rate of tax.
|
Highest age at any time during the tax year |
Limit |
|---|---|
| Under 30 | 15% |
| 30-39 | 20% |
| 40-49 | 25% |
| 50-54 | 30% |
| 55-59 | 35% |
| 60 and over | 40% |
The Pension and Saving Calculators
To help people understand the costs and benefits involved in saving for a pension the Board has developed Pension and Saving Calculators on its website, www.pensionsboard.ie. The Pension Calculator allows people to key in their age, current salary, and the value of a fund (if any) invested to date and their target pension as a percentage of their pre-retirement salary. The calculator will then estimate the monthly contributions needed to provide for their pension at retirement.
In addition to this the Board introduced an Advanced Pension Calculator allowing additional information to be inputted which gives a more detailed picture of the various aspects involved in pension planning. For example it can take into account -
- whether or not the prospective retiree wishes to take a tax-free lump sum on retirement
- whether a 50% spouse’s pension on death should be included
- the marginal tax rate of the individual (20% or 41%) and allows for proposed monthly contributions in monetary amounts or as a percentage of salary in respect of both the employee and employer.
The advanced calculator also demonstrates greater flexibility with regard the intended retirement age, allowing the individual to assess the options of retiring at any age between fifty and seventy years. The result of this advanced calculator is that people can get a real sense of the options and issues involved when planning for their retirement.
The Pensions Board is as always concerned with the adequacy of pension provision and continues to encourage those who have a pension to check the value and whether they are making sufficient contributions to ensure an adequate pension in retirement. For those nearing retirement age the Pensions Board continues to recommend that lower risk options be made available to scheme members as they approach retirement so that the growth experienced can be realised.
Different Types of Pensions
-
Occupational/ Company pension schemes which are set-up by the employer and can be
- Defined benefit scheme – providing a defined level of pension benefit at retirement, usually based on your years of service and your earnings at retirement. Benefits can be affected if your pension scheme is not fully funded.
- Defined contribution scheme – providing for your pension at retirement and the amount at retirement depends on the contributions made, return on the investment less fees and charges, where applied.
- Hybrid scheme – is a pension scheme which is neither a full defined benefit nor a full defined contribution scheme, but has some characteristics of each.
-
Personal Retirement Savings Accounts (PRSAs) which are private pension plans set-up between the individual and an authorized PRSA provider. PRSAs are a type of defined contribution scheme, the value of which on retirement is determined by the level of contributions paid, the investment return achieved and the fees and charges. There are two types of PRSA –
- Standard PRSA – the charges are capped on the contributions made, there are restrictions on the type of funds in which the contributions can be invested and there is no compulsion to purchase any other products when applying for a Standard PRSA.
- Non-Standard PRSA – there is no limit on charges and investments can be made in a range of funds.
- Retirement Annuity Contracts (RACs) are private pension plans set up between the individual and an RAC provider. RACs are a type of defined contribution scheme, the value of which on retirement is determined by the level of contributions paid, the investment return achieved and the fees and charges.
Information Booklets
- What are my Pension Options?
- Women and Pensions
- Personal Retirement Savings Accounts (PRSAs) A Consumer Guide
- Personal Retirement Savings Accounts (PRSAs) Employers’ Obligations
Further Information
