Money Talks: the complete expert guide to planning a pension
Budget 2022 - how organised is your pension?
With life expectancy rates in Ireland at around 82, you may need to save for a retirement income that lasts up to 30 years.
Key to this is estimating what your likely expenses will be in retirement. Usually, these will be much lower in retirement than during other phases of life. Your mortgage will hopefully be paid off and there’s a good chance your kids will no longer be financially dependent on you.
Furthermore, PRSI contributions from your income currently cease at the age 66 (this may change in the future, however). There are also some income tax concessions for retirees which may improve your net income position in retirement.
You can draw down from your pension fund early (from age 50) regardless of whether you have retired or not. This is an extremely important benefit if you wish to maybe access capital for any reason before the Normal Retirement Age of 65. Remember though that any capital you draw down except for your tax-free cash lump sum is taxable.
The full value of the Personal Retirement Bond is payable to your estate in the event of your death. Capital Acquisition tax may apply depending on the beneficiary, but not between spouses/civil partners.
Also, ensure that you are aware of all aspects of your pension scheme and do not be afraid to ask the necessary questions. Ensure that you are aware of where your money is being invested and, with advice, make changes to your investment funds as necessary.
If you do plan to retire at 60, you need to review your pension regularly in conjunction with your advisor to ensure that you are heading in the right direction funding-wise and that the expectant pension income will be enough.
A HerMoney survey revealed that 45% of women claimed to have old pension policies in place from previous employment but 52% of these had never reviewed their policies with no idea of how they were performing or how much their funds would be worth to them in retirement. If you are unsure of where you stand in terms of any other retirement benefits you have in place to date, talk to your advisor who will help you in this regard.
Income tax is payable on all relevant income in retirement regardless of whether the source is private pension income, state pension, rental income, part-time paid employment, etc. However, some exceptions apply and how much tax if any is paid on this income will basically depend on how much you earn.
Every single person in Ireland under 65 pays income tax at the standard rate of 20% on everything they earn up to €35,300 a year. Anything earned above this €35,300 threshold gets taxed at the 40% marginal rate and this liability is then reduced by your tax credits. For married couples, one can earn up to €44,300 @ 20% and the other can earn up to €26,300 @ 20%. You do not have to pay any income tax on income up to €16,500 p.a.
So basically, in retirement, private pension payments will be subject to your marginal rate of tax of 20% or 40% and USC. (PRSI is currently payable to age 66 only). Furthermore married couples over the age of 65 can opt for the Lower Exemption Limit which entitles them to jointly earn up to €36,000 tax-free with any excess income taxed at 40%.
