A PENSION IS AN INCOME AFTER RETIREMENT. NOW MORE THAN EVER THE RESPONSIBILITY FOR PROVIDING AN INCOME AFTER RETIREMENT IS YOURS. WE WILL EXPLAIN EVERYTHING CLEARLY FROM SCHEME SET UP TO INVESTMENT, BOTH BEFORE AND AFTER RETIREMENT. GET YOUR PENSION WORKING FOR YOU AND FEEL BETTER ABOUT IT.
Use the interactive notebook below to get a better understanding of pensions.
Save Tax on Contributions
Contributions to your pension are tax-deductible. For example, if you are paying tax at 40%, you can save €40 for each €100 contribution to your pension plan. The actual cost of your pension contribution is only €60, because you save €40 on the tax deduction. There is a limit to the amount of tax relief you can get. It depends on your age and the current maximum earnings limit is €115,000
Enjoy tax free growth
The investment returns of pension funds are free of tax. Tax-free compounding of growth can lead to much higher end-values when the funds are invested over a long time period. This ultimately leads to a larger retirement benefit for the end investor.
Take a tax-free lump sum
When you retire, the first €200,000 of your retirement lump sum can be taken tax-free. Any excess above this amount will be subject to income tax. The maximum lump sum you can get tax free is 25% of the value of the fund in the year of payment. If you are a member of an occupational pension scheme, the tax-free lump sum depends on the number of your working years and can be up to 1.5 times your final salary.
Personal Retirement Savings Account (PRSA)
A PRSA is a personal pension plan that allows you to save for retirement in a tax-efficient manner. You can make regular contributions that are tax-deductible up to certain limits, depending on your age. It can be useful for employees whose employer does not offer an occupational scheme, or for self-employed workers. Your PRSA is not affected by your change of job and you can transfer to different PRSA provider without any charge.
Buyout Bond (BOB) - also known as personal retirement bond
What happens to your pension if you leave a company with an occupational pension scheme or your current pension scheme is wound up? One solution is to transfer your old pension pot to a BOB, a personally owned pension plan that you can then access at retirement. A BOB gives you control as to how your pension fund is invested.
Group schemes (occupational pension schemes)
Group schemes are pension plans which are offered by employers. In Ireland, large employers often have group schemes which can be categorized as defined contribution pension plans (DC) or defined benefit pension plans (DB)
Employees are guaranteed a certain level of income during each year of their retirement. The amount they receive can be based on several factors, including the employee's salary and years of service. Employers bear the investment risk as they guarantee a specific retirement benefit for each employee. In recent year, employers have increasingly sought to move away from DB plans and instead offer DC pension schemes
Both employees and employers contribute funds over time that are invested with the aim of providing for the employee in retirement. The retirement benefit which employees will receive is not fixed as it depends on the level of contributions, the investment returns and the fees charged. Under DC plans, the investment risk is firmly with employees rather than the employer
Additional Voluntary Contributions (AVC’s)
The pension contributions from your employer do not always take you up to the maximum, tax-efficient amount allowed. This shortfall can be bridged by making AVC’s. These supplemental contributions can either be paid into your occupational scheme at work, or into a PRSA.
Approved Retirement Funds
ARF’s are personal pension funds that you can transfer the balance of your pension to after taking your retirement lump sum. Once you hit the age of 61, you are required to withdraw 4% of your ARF’s value on an annual basis. This rises to 5% once you are over 70 and 6% if the value of the ARF is greater than €2m. ARF’s are quite flexible from an investment perspective, as you have a wide choice as to what you can invest in
Approved Minimum Retirement Funds
Unless you have a guaranteed annual income of at least €12,700 then you are required to take out an AMRF before taking out an ARF. You must invest €63,500 in an AMRF and no income can be drawn from the initial investment until age 75
You can use all or a part of your retirement fund to a purchase an annuity from a life assurance company. This will provide you with a regular income, usually monthly, for the rest of your life. The amount of this income depends on several factors, such as the value of your retirement fund, your age and state of health
Trustees are responsible for ensuring that the pension scheme is run properly and that members' benefits are secure.
Our trustee of choice is Independent Trustee Company Ltd, the largest providers of self-administered pensions in Ireland. ITC administer €1.2 billion of client funds in 4,000 pension structures and are recognised technical experts.
Retire in Comfort
Your pension will provide you with an income during retirement to support the lifestyle you desire. If you purchase an annuity this amount is set at a certain level, while if you are invested in an Approved Retirement Fund (ARF) then your retirement fund will still have a chance to grow during retirement. While the growth of your ARF is tax-free, the annual mandatory withdrawals are taxable as ordinary income.
Flexible Investment Strategy
Depending on the type of pension you have, you can have a high degree of control over the underlying investment strategy. In general, there is less choice for occupational schemes and more choice for personal pensions.
The investment returns of pension funds are free of tax. Tax-free compounding of growth can lead to much higher-end values when the funds are invested over a long time period. This ultimately leads to larger retirement benefits.
Pensions can play an important role in effective estate planning. Pre-retirement pensions (PRSAs, BOBs, PBFs and SSASs) transfer tax-free to the deceased’s estate but are then subject to the normal inheritance tax rules. ARFs can be passed to a spouse of civil partner without payment of CAT or income tax but subsequent distributions are subject to normal income tax rules.
Small Self-Administered Scheme
A Small Self-Administered Scheme, or SSAS, is an occupational pension scheme with less than 12 members. SSASs are often used by the directors of limited companies. They offer a large degree of control over the underlying investment strategy while contributions from the company to the SSAS are tax-deductible
Sometimes employees in a DB pension scheme are offered a Transfer Value to transfer out of the scheme. The amount you are offered depends on a number of factors including: your contributions to the scheme, your years of service, the health of the underlying pension scheme and how close you are to retirement. Transferring out may be beneficial, but it is an important decision that should not be taken lightly.
Enhanced Transfer Value
Some companies are particularly eager to reduce the number of participants in their DB scheme and will offer an Enhanced Transfer Value as an incentive for the scheme members to transfer out.