For many people, retirement seems like a long way off, so they tend to put it to the back of their minds.
However, you’re probably not planning on reducing your standard of living when you retire, so it’s worth thinking about how you’re going to pay for it when you’re no longer working.
There are many reasons why you need a pension, here are three:
1. You may need an income for up to 30 years or more after you retire. People are living longer which means you may be retired for up to a third of your life. That’s why it’s so important to have a savings plan that ensures that the money you earn during your working life lasts your whole life. Your pension plan is one of the most important savings plans you will ever establish. It can provide you with an ongoing income to ensure you have the money you need to enjoy your retirement years.
2. Your income could drop by almost 70% in retirement When you retire, you’ll probably assume that you will have the same standard of living. However, unless you put a pension plan in place, your income could drop by almost 70% in retirement. The State Pension (Contributory) is €12,652 a year or €243.30 a week (July 2018) but the average salary in Ireland is €38,594. You need to start saving for your retirement to help avoid a big drop in income, and the impact this would have on your lifestyle.
3. If you qualify for the State Pension, you could be 68 before you receive it. The age of eligibility for the State Pension (Contributory) has changed and no longer starts at age 65. If you were born on or after 1 January 1961 the minimum qualifying State Pension age will be 68. That’s potentially a three-year gap in retirement income between when you retire and when you receive the State Pension (Contributory). A personal pension provides you with the opportunity to take control of your financial future and plan wisely for your retirement.
What is a Personal Retirement Plan?
As the name suggests, a Personal Retirement Plan is a plan set up by you to save for your retirement. It is a tax efficient savings plan that has been designed to help individuals build up a fund for their retirement in a flexible manner. On retirement, the fund can be used in a number of different ways: you can take up to 25% of your fund as a tax-free lump sum and invest the balance in an Approved Retirement Fund (ARF) or you could purchase an annuity which will provide a guaranteed income for life.
Contributions With a Personal Retirement Plan
You can pay contributions monthly, quarterly, half yearly or yearly by direct debit staring at a minimum of €100.00 per month. In addition to your regular contributions, you can also make lump sum payments into your Personal Retirement Plan at any time.
How much do I need to save?
As a general rule of thumb, you should be aiming for an income of between 50% and 66% of your final salary. However, everyone’s situation is different, and it really depends on the type of lifestyle that you want for yourself in retirement, as well as on your own specific circumstances. Jameson Financial will discuss your retirement needs with you and help you put a plan in place designed to achieve your financial goals. The following factors will be taken into account: based on:
- your current age
- when you would like to retire
- the kind of lifestyle you’d like
- what you can afford to save
How flexible is a Personal Retirement Plan?
A Personal Retirement Plan is very flexible with a variety of options to suit you. You can:
- increase or reduce your contribution amounts
- pay contributions monthly, quarterly, half yearly or yearly
- stop contributions and restart at a later date
- add indexation to your plan which means that your contributions automatically increase by 5% each year to protect against the effect of inflation
- make lump sum payments into your Personal Retirement Plan at any time • change the fund(s) that your contributions are invested in.
As well as saving for your retirement, you can also avail of generous tax savings by contributing to a personal pension.
Income tax relief
If you are a higher rate taxpayer, for every €1 you save, you can benefit from up to 40% in tax relief. So, if you make an overall monthly contribution of €100, this means it will actually only cost you €60 after tax relief. For a standard rate taxpayer (20%), a €100.00 monthly contribution will only cost €80.00 with the government paying €20.00 in tax relief.
Unlike other savings plans, under current legislation your pension fund is allowed to grow without being subject to tax. You pay DIRT of 33% on any interest earned on bank accounts and exit tax of 41% on any gains made on most investments. You pay 0% tax on any growth within your retirement fund. This means that you can benefit from any growth and income that your fund may earn until you draw down your retirement benefits.
Tax-free cash on retirement
On reaching retirement, you may be able to take up to 25% of your retirement fund as a tax-free lump sum, subject to a limit of €200,000. Even where the retirement lump sum is
greater than €200,000, the next €300,000 is only taxed at the standard rate of income tax. Therefore, the retirement lump sum is an attractive option at retirement.
Options at retirement
You can draw down benefits between ages 60 and 75 even if you are still working.
OPTION 1 – Pension
You can buy a pension (also known as an annuity). This will provide you with a regular secure income, which will be paid for the rest of your life. Income from a pension is liable to income tax under the PAYE system. You may purchase your pension from any pension company. Therefore, you can maximise your retirement income by choosing the company that is offering the best pension rates when you retire. You can choose a pension that is payable for your lifetime only or one that continues to be paid to your spouse on your death. You can also choose a level pension or one that will increase every year.
OPTION 2 – Invest in an Approved Retirement Fund (ARF)
You can choose to invest your fund in an ARF. An ARF allows you to invest your retirement fund in a range of investments managed by approved providers As you retain ownership of your retirement fund with an ARF, you can make withdrawals as you wish subject to tax. If you die, your ARF becomes part of your estate and can be left to your spouse or children.