There used to be an ad on the TV where people on a bus admitted they didn’t understand financial services products. The line “I don’t know what a tracker mortgage is” gained great currency. If you feel the same about pensions, hop aboard.
Why do I need one?
Because chances are, thankfully, you’ll live to a ripe old age. If you don’t want to have to spend that time working, or aren’t well enough to do so, you’re going to have to have some form of savings. A pension is the best way to do that. It’s the most tax-efficient form of saving there is, so the earlier you start the better the outcome in retirement.
Can’t I just live on the State pension?
Yes, if you qualify, you’re very, very frugal, and you’re lucky enough not to be still paying off a mortgage or rent, in which case you’ll find it hard. The contributory State pension is currently paid to people who are 66 and over, though that age threshold is set to rise to 67 in 2021 and 68 in 2028. To qualify, you have to have paid enough in social insurance contributions, and have started before the age of 56. It currently stands at €248.30
Why don’t I just save?
You get tax relief on pension contributions of 20 per cent or 40 per cent depending on the rate of income tax you pay and subject to salary limits set by Revenue. These range from 15 per cent of your salary for under 30s to 40 per cent for those over 60. You don’t have to pay tax on the growth of your fund and, while you will have to pay tax on the pension you draw down, you get a tax-free lump sum on retirement. There’s simply no other funding scheme that offers such great tax treatment.
What kind of schemes are there?
Occupational pension schemes are set up by an employer, into which they make a contribution. As an employee, you too pay a contribution, which is taken from your salary – you don’t have to pay tax on it. In the old days, most occupational pension schemes provided a defined benefit, that is, you were assured of getting a certain proportion of your final salary as retirement income, up to two thirds if the length of your service was long enough. These days, job tenures are shorter and defined contribution schemes are much more prevalent. With these, only the accumulated total of all your contributions, in various jobs, is certain, and the outcome depends on the performance of the investment fund.
What if I’m not in an occupational pension scheme?
You can take out a personal pension, which is a private plan managed by a life assurance or investment company. It’s an option used by those who are self-employed or whose employer doesn’t have an occupational pension scheme. With a personal pension plan, you organise it, set your own contributions and claim the tax relief yourself. By the way, if your employer doesn’t offer an occupational scheme, it should at least offer you access to a Personal Retirement Savings Account (PRSA). This is more flexible than a traditional personal pension, is open to anyone up to age 75 to take out and you don’t have to be earning an income to do so.
How much should I put a personal pension or PRSA?
It depends on how much you can afford and what your retirement savings goals are. Some allow you make regular or lump-sum contributions – or both – and it’s important to review your plan regularly to make sure it’s on track. Before you choose a product or provider, check fees and management charges, as these vary.
On retirement, what happens to my pension fund?
You can take your fund and buy an annuity, which guarantees to pay you a regular income for the rest of your life – how much you get depends on the ‘annuity rate’ on offer. You can choose to have a reduced annuity pension go to a dependent after you die, but it will cost you more to buy. You can also choose one that stays in line with inflation, again at an extra cost. If you die and haven’t chosen for a reduced annuity to go to a dependent, your entire pension dies with you, or rather, reverts to the life assurance company.
What’s the alternative?
An approved retirement fund (ARF). If you choose to invest in one of these on retirement, instead of an annuity, you keep your money invested after retirement (take advice!), withdraw an income from it and, if you die, it’s left as part of your estate. The amount you can draw down annually is limited to about 5 per cent. The initial investment is not guaranteed and growth of your ARF fund depends on investment performance but, unlike an annuity, it can run out. This can happen if it doesn’t perform well, you draw down too much from it, or you live longer than you expected. Once you choose an annuity that’s it, you can’t change your mind. You can change your mind in relation to an ARF and buy an annuity later on if you want to.
What if I own a business, are there other options for me?
A small, self-administered pension (SSAP) is a corporate pension option which may be of interest to family businesses or groups of company directors. With it, you decide what the fund will invest in, but all must have a Revenue-approved trustee, that is, an independent person with experience in setting up and administrating pensions. Traditionally, SSAPs are invested in property which, as the recession showed, isn’t always as safe as houses.
Can I use an SSAP to buy a holiday home, jewellery and a vintage car?
No.
