, financial advisor with HerMoney.ie, suggests some good places to start when you're considering your retirement options.
For many people, pensions and retirement planning are topics they are not comfortable engaging with.
There can be many reasons for such reluctance, but not feeling well-informed on the options available, or believing that state retirement benefits will be sufficient, tends to be the main reasoning when putting pension planning on the long finger.
It is never too late or too early to learn about pensions or to start one. However, the sooner you start a pension the better as it will lessen the financial burden of starting it later in life.
The current Contributory State Pension, if you are entitled to it, stands at just over €13,100 per annum, which for many would mean a significant drop in income on retirement.
While the state pension amount is unlikely to drop in the future, it may not always increase to keep pace with inflation and one thing we can be more certain of is that the age at which you become eligible for the state pension will change from 66 where it is currently, being pushed out to age 68 before most of us will become eligible for it.
Put simply, if you wish to retire from age 65 or earlier, the need for adequate private pension provisions becomes an absolute necessity.
So where to start when considering a private pension? The answer to this depends on your employment status. If you are a full-time employee, your first port of call should be your employer. Many employers provide a pension scheme into which they will contribute a portion of the overall contribution.
The employee also has the facility to contribute AVC’s (Additional Voluntary Contributions) if they wish to fund for their retirement beyond the basic contribution set out by the employer.
However, there is no legal obligation on an employer to set up or to contribute to a pension scheme. If an employer doesn't have a staff pension scheme in place, they must provide their staff with access to at least a Standard PRSA.
Employees then can make contributions to this scheme and relevant tax relief will be processed at source through payroll.
For sole traders or company directors, pension contributions can be treated as a legitimate company expense. As soon as the business can afford it, a pension should be made a priority for the dual advantage of providing an income in retirement as well as reducing the business’s tax bill today.
Getting a plan in place for the retirement you want needs to be a priority. Seek independent financial advice to get you started on the correct path. A financial advisor can help identify the income you wish to achieve in retirement and put together a realistic plan to achieve this goal.
They can also review any existing pension pots you might have in place, and ensure these plans are working for you and align with your retirement goals Regardless of your employment situation, be it self-employed or an employee, the basics of saving into a pension are the same for all.
There are three distinct tax advantages of contributing to a pension:
Generous tax relief on pensions means that saving for your future won’t cost as much as you might think. Contributions to a pension receive tax relief at your marginal rate of tax, so if you were to contribute €100 to a pension and your marginal tax rate is 20%, this contribution would have a net cost of €80. If you are a higher rate taxpayer, the tax relief is at 40%, so a contribution of €100 into your plan will cost you just €60.
invested into your pension are allowed to grow tax-free which is of great benefit when compared to the alternative where savings & investments have taxation on any gains at a rate of 41%.
When it comes time to retire and draw down on your pension, you will be entitled to take at least 25% of your fund, to a maximum of €200,000 as a tax-free lump sum.
Now is the time to start contributing to your pension. Seek independent financial advice and create a retirement plan to set yourself up for the retirement you deserve.