Retiring soon? Vital advice on pension research

Nearing retirement? Don’t forget the state pension. Check your PRSI record and work out what you’re entitled to. The state pension can make a significant difference to how much you need to draw from your private pension.

The last few years before you retire is a critical period in the life of your pension. Taking the time to think about your fund – and taking advice from the experts – will make a significant difference to your quality of life post-retirement.

First off, review your investment strategy as retirement approaches. Don’t automatically move everything into cash, but equally, don’t leave the entire fund exposed to high-risk investments immediately before you need it. The appropriate balance depends on when and how you intend to draw the money down.

If you’ve got a few years to go, you need to think about the best way to inflate that fund ahead of retirement day. October 31st is the deadline for 2025 AVC contributions. If you’re over fifty and have spare savings, it would be a smart move to add money to your pension.

Michael Cunningham, MD of GSB Capital Ireland says that if you’re a top rate taxpayer, every €10,000 you pay in will generate a €4,000 refund from Revenue, costing you only €6,000. Moreover, that €10,000 will grow free of capital gains tax.

“If you’re younger than fifty,” says Mr. Cunningham, “it can be useful to use pensions simply as a wealth portfolio, as well as a retirement vehicle. They grow tax-free, you get the income tax relief…and you can access some pots from age fifty and use them for non-retirement purposes. The standard fund threshold, which is the cap of pension savings before additional taxes, is rising to €2.8m, a fair chunk of change.” 

Michael Cunningham of GSB Capital Ireland.

 If you’re at a later stage of the game and don’t envisage any further contributions, your first step is to work out what you actually have. Get up-to-date valuations for all pensions: occupational schemes, PRSAs, personal pensions, AVCs and any old pensions from previous employers. Don’t assume the figure on an old annual statement is still current.

Don’t forget the state pension. Check your PRSI record and work out what you’re entitled to. The state pension can make a significant difference to how much you need to draw from your private pension.

That’s the income side; now think about expenditure. Separate the first ten to fifteen years from the later years. Travel, cars and hobbies may cost more initially, while other costs will likely fall once you stop working. Review your mortgage and other debts. Entering retirement with a large mortgage or expensive consumer debt changes the amount of pension income you'll need.

Now work out the gap between income and spending. Add your likely state pension, occupational pension income, rental or investment income and other resources, then see how much has to come from the pension pot each year. 

While it’s always a good idea to work out when you can retire, experts point out that this doesn’t mean that this is when you should retire. Working another year or two can have a surprisingly large effect: more contributions, investment growth for longer and fewer years over which the fund has to support you.

Understand your retirement options before you take anything out. Depending on the type of pension, you may be able to take a retirement lump sum and use the remainder to buy an annuity, put it into an Approved Retirement Fund (ARF), or take some or all of it as taxable cash.

Let’s take a look at that lump sum. You can take up to 25% from a pension at retirement in this way. Once this 25% doesn’t exceed €200,000, it will be tax-free. Where the 25% lump sum exceeds that threshold, the balance – up to a maximum of €300,000 – is taxed at 20%. So if you were fortunate enough to have a million in your pension pot at retirement, you could take a lump sum of €250,000. €200,000 of this would be tax-free and the other €50,000 would be taxed at 20%, leaving you with a net €240,000.

Paul Murray of Quest Retirement Solutions explains that occupational pensions, also known as employer pension schemes, offer an option of taking up to 150% of your final salary as a lump sum, based on your length of service with the company.

What about the remainder of the fund?

“You can take the balance as taxable income, just like salary,” says Mr. Murray. “You can set up an Approved Retirement Fund, or ARF, which is very similar to a pension, where your funds are invested and you take an annual income … You can invest these funds in the same way or in the same assets you invested in through your pension scheme.” 

 Alternatively, you can buy an annuity, which works like this: you give the remainder of the pension fund after the lump sum to an insurance company, and in return, the company gives you an annual income for a set period of time or for the rest of your life.

Consider these two alternatives carefully. An annuity gives you a guaranteed income, whereas an ARF leaves the money invested and gives you greater flexibility and potential inheritance benefits – but also investment and longevity risk. Longevity risk is insurance-speak for outliving your pension pot.

It’s also worth finding out what happens to the pension income if you die before your partner. This can materially affect the choice between different annuity and ARF arrangements.

Consider broader inheritance issues too. An ARF is an asset belonging to you, whereas an annuity generally provides income rather than an inheritable pot. The treatment on death varies according to the pension arrangement and who receives the benefits.

Don't focus solely on the size of the fund. A €600,000 pension pot doesn't tell you nearly as much as knowing how much sustainable annual income it can provide alongside the state pension.

Get your tax affairs organised before the first pension payment. Private and occupational pension income is generally taxable through PAYE, and your provider will deduct the relevant tax.

And don't make major pension decisions based on the advice of the person selling you the product. Annuities, ARFs and investment products have different charges, risks and incentives. For a sizeable pension, independent regulated advice can be well worth paying for.

Finally, make a retirement plan rather than just a pension plan. Decide what you want your money to do: how much you want to spend, how much security you need, whether you want to leave an inheritance and how much investment risk you’re comfortable taking. The pension is the means of funding that plan, it’s not the plan itself.