Pensions Explained without the Jargon!

What you need to know about pensions!

The State pension retirement age has been in the news a lot lately. Will the qualifying age be extended upwards or be reduced back down? Only time will tell, we mere mortals have no control over this. However, we have control over starting a pension and completing a review of existing Pensions – Active or Paid up pensions. A pension is deemed to be “Paid up” when you are not currently paying any money into it.

Here are the first 5 areas to consider:

1. Pension Time Bomb
   You may have heard the above term in the news lately. What does it mean and why should it concern you? It’s all down to Ireland’s demographics! For every one person who retired last year, there were five workers, however by 2050, for one person retired there will be only two workers! 

That means that the current State Pension promise will be unsustainable in 2050, this is the main reason the Government has raised the State pension age to age 68. With the average life expectancy increasing every year, our time horizon for living in retirement may be much longer than we realise. That is why we need to take control of our own future lifestyle by making sure we have enough money to maintain that lifestyle. The word “lifestyle” can have a different meaning for everyone, for some it’s being able to continue the day to day activities you currently do with your income. To others it’s travelling to exotic places. Either way, our personal retirement savings will help us to sustain our lifestyle in support of the state pension.

2. Who does this concern?
   Everyone and anyone who does not want to be limited to the state pension alone or who may want to retire before they become entitled to the state pension benefit.  You are never too young or old to start a pension, but the younger the better. Especially if you want to avail of what Einstein referred to as the “eighth wonder of the world” – compounding!

While some people will benefit from a pension arranged by their employers, other employees may have started personal pension plans. Some people will aim to use a property as their way to fund their retirement. However, according to the most recent CSO report, approximately 40% of the population aged 29 -69 have no pension. Of the remaining 60% most people are not putting away enough savings also referred to as funding their pension.

3. Why use a Pension as the solution? 

Some people wonder, ‘are pensions worth it?’ when they first begin thinking about this process. The simple answer is yes. While your monthly costs may be less when you are retired, you will still have outgoings, especially if you wish to complete your bucket list or just enjoy being retired. Simply put, a pension is a long-term saving plan which is extremely tax efficient. These tax breaks are as follows:

• Tax relief on the contribution that you make at your marginal rate of tax

• Tax Free growth within the pension fund
• The Tax-Free Cash from the pension fund at retirement age of up to 25% of the fund to a maximum tax-free value of €200,000.
• Subject to your circumstances, you may have to pay tax on your pension income at 0%, 20% or 40% – this is where you need our advice, to guide you on tax efficiency in retirement.

4. What to do next?

Just start! Don’t put it off any longer, as mentioned previously, the earlier you start the better. Revenue dictates the maximum you can contribute called Age-related percentage limit for tax relief on pension contributions. With a total earnings limit of €115,000 per year used for calculating tax relief. These are the age related thresholds:

• Age 20 – 29     =    15% of income
• Age 30 – 39        =     20% of income
• Age 40 – 49     =    25% of income
• Age 50 – 54        =    30% of income
• Age 55 – 59     =    35% of income
• Age 60 +        =     40% of income

5. What type of Pension should I choose?

This is determined by your employment status:

1. A Company Director can start an Executive Pension Plan or a Small Self Administered Pension – SSAPs
2. An Employee whose employer does not provide a pension arrangement can start a Personal Pension Plan, or a Personal Retirement Savings Account (PRSA). Note an employer is obliged to provide access to a PRSA to facilitate deduction of contributions from payroll. They are not obliged to contribute.
3. An Employee whose employer provides a pension will be in a type of Occupational pension. The employee can also make additional contributions to a pension plan called AVCs. (Additional Voluntary Contribution)
4. A Self-Employed Individual can start a Personal Pension Plan, PRSA (Personal Retirement Savings Account) or a Self Invested PRSA.
5. Interestingly a person who is unemployed can start a PRSA. However, without a taxable source of income it may be allowed but not a viable option also they may not be in a position to claim tax relief on the contributions.

Next week’s blog will cover what you should be doing once you have your pension in place.