Although you may be years from retiring, it’s worth considering the type of lifestyle you’d like to have when you retire. Maybe you’re looking forward to spending more time on the golf course, taking that trip to Europe, or learning a new language. Whatever your plans are you’ll need to finance your retirement years. And after years of getting up early and going to work, taking care of your family and saving for your retirement, you’ll finally be at a stage where you can think about you again.
DO YOU HAVE A FINANCIAL PLAN FOR YOUR RETIREMENT YEARS?
That’s the question we all need to ask ourselves, whether we’re in our twenties, thirties or nearing retirement age. At this stage, you have 2 options, do nothing and live on the state pension or act now and start planning for your retirement years.
OPTION 1 – DO NOTHING AND RELY ON THE STATE PENSION
If you do nothing, when you get to retirement age you will be relying on the State Pension, assuming you are eligible. The single rate State Pension (Contributory) is just €233.30 a week or just
€12,132 a year which is less than the current minimum wage (Source: Citizens Information, 2016). It’s important to look at the difference between your current income and what you would receive on the State Pension. And ok, by the time you get to retirement any mortgage you have may be paid off, but you will still have bills, and all the expenses of day to day living.
Ask yourself will €233.30 a week give you the lifestyle you want in your retirement years?
OPTION 2 – START YOUR PENSION TODAY
No matter what age you are it’s important to start thinking about and planning for your retirement years. The earlier you start saving into your pension, the more comfortable your retirement could be. Any delay can have a big impact on your pension fund when you reach retirement. The graph below shows how much someone who saves €250 every month from ages of 30, 35 and 40 will have each year when they reach retirement at age 65.
The graph shows that even a delay of 5 years could have a big impact on your retirement income.
This chart shows pension contributions of €250 per month paid into a Clear PRSA plan from the ages of 30, 35 and 40 to the age of 65. The graph assumes 95% of the contribution is invested, 1% fund charge, 4.4% growth rate, indexation at 2.5% and no policy fees.
Remember you cannot access your pension fund until you reach retirement age. The performance of your pension fund is dependent on the funds you choose and the value of the funds when you reach retirement age.
This information is correct as of 1 September 2016.
Warning: These figures are estimates only. They are not a reliable guide to the future performance of your investment. If you invest in this product you will not have any access to your money until age 60 and/or you retire.
Click on the images of your last BIG birthday to find out more:
WHAT TO DO IF YOU’RE 30-SOMETHING
WHEN IS THE BEST TIME TO START A PENSION?
It’s true to say that the sooner you start a pension, the longer it has to grow and the easier it can be to reach your target. Even a small regular investment could deliver big results if you start in your twenties.
The strange thing about your thirties is that, although you’re probably getting paid more than when you were younger, you seem to have less in your pocket at the end of the month.
So how do you fit a pension into all of this? % of those with a pension feel secure about their EAR
€5,632 PER YEAR
TAKE ADVANTAGE OF INCOME TAX RELIEF
Even if you have all the savings you’ll ever need, a pension would still be worth it for the income tax relief alone. Did you know that whatever money you put into your pension receives income tax relief if you are eligible for it, which basically, means you pay less tax if you save some money into your pension?
For example, if you invest €100 in your pension, as a lower rate tax payer, it saves €20 off your tax bill. For higher rate taxpayers the benefit is even greater, saving €40 for every €100 you invest.
WHAT TO DO IF YOU’RE 40-SOMETHING
TIME FOR ACTION
If you haven’t started a pension, now is the time to get serious. You can expect to be spending as many years if not more in retirement as you have left in work. By starting your pension today, you still have the opportunity to get income tax relief and have the time to build up an adequate pension plan.
For those of you with a pension already, it’s very easy to put it away in a drawer and forget about it. But just think your pension is an investment that you should keep an eye on. So if like Patrick you’ve forgotten about your pension, talk to us today, as we’re here to help you understand your pension and answer all your questions. 1 in 3 people claim they don’t really understand And remember the benefit of regular reviews and adjustments is invaluable. You could be missing out on tax incentives. Or you could be still contributing the same amount into your pension as you did when you started, even though you now earn more. Or if you are a couple with both of you earning, there are ways to maximise income tax relief for each of you. 1 in 3 people claim they don’t really understand.
WHAT TO DO IF YOU’RE 50-SOMETHING
SET UP A PENSION REVIEW
As you enter your 50s retirement doesn’t seem quite so far away. It’s time for some more detailed planning. The key thing to realise is that, whatever your current situation, there’s plenty you can do to improve your lifestyle in retirement, providing you act now. Your Financial Broker or Adviser will review your existing Pension Plans and discuss your expected retirement goals.
It’s true to say that the sooner you start a pension, the longer it has to grow. But if you don’t have a pension, that doesn’t mean you’ve missed the boat altogether. The system is designed to help you catch up. The older you are, the higher the percentage of your salary you can invest in a pension. Don’t worry about the years that have gone, just maximise your efforts in the years to come and use all your extra income tax relief.
So for example, if John’s salary is €60,000 he could invest up to €21,000 (35% of €60,000) and receive income tax relief on this contribution, resulting in a net cost of €16,800 at 20% income tax relief or €12,600 at 40% income tax relief. Pension income in retirement is subject to income tax at your highest rate on withdrawal, Universal Social Charge (USC), PRSI (if applicable) and any other taxes or government levies due at that time.
TAKING LESS RISK APPROACHING RETIREMENT AGE
As you’re approaching retirement age you’re probably more cautious and may want to consider investing in lower risk funds.
Irish Life offer a very practical solution called Lifestyling. This involves gradually moving your own choice of funds to a mix of medium-risk to low-risk funds as you move closer to retirement. These strategies are suitable if you want to invest in high-risk or medium-risk funds over the term of your pension plan but want to move gradually into a mix of medium-risk and low-risk funds as you get nearer retirement. Ask your Financial Broker or Adviser for details.
OPTIONS FOR RETIREMENT
When you reach your retirement age there are some different options of what to do with your Pension Fund. It is important that you start looking at them early to plan for the approach that suits you best.
So what happens when your pension finally starts paying out instead of you paying in? Most pension plans are designed to provide you with an income supplemented by the State Pension.
RETIREMENT LUMP SUM OR REGULAR INCOME
When you retire you stop paying into your pension and the fund is closed. You then have a variety of options. Most people choose to take advantage of a retirement lump sum of up to 25% of the pension fund, of which the first €200,000 is tax free up to certain limits
For company pensions your lump sum may be based on your salary and service (up to a maximum of one and a half times your annual salary). The maximum tax free amount you can receive is €200,000. Retirement lump sums between €200,000 and €500,000 will be subject to standard rate income tax, currently 20%. Any retirement lump sum greater than €500,000 will be taxed at your marginal income tax rate. The Universal Social Charge, PRSI (if applicable) and any other taxes or government levies due at that time will also be deducted.
The rest of the fund can be re-invested a number of ways to provide you with an ongoing pension income. All pension plans allow you to buy an annuity, which will provide you with a regular monthly income in retirement. Some types of plans give you further options – to invest in an ARF (Approved Retirement Fund) or AMRF (Approved Minimum Retirement Fund), remain invested in your PRSA (vested PRSA) or take a taxable lump sum.
WHAT IS AN APPROVED RETIREMENT FUND (ARF)/VESTED PRSA?
An ARF or a vested PRSA are retirement funds that allow you flexibility with your pension income, while also allowing you the opportunity to further invest. This provides you with greater flexibility and independence, and is now available to employees as well as directors. When you retire, you can invest your retirement fund in a personal investment account called an Approved Retirement Fund.
The key benefit is that you can withdraw money from the account when you need.
Warning: The income you get from this investment may go down as well as up.