Whats the first thing that pops into your head when you hear the word pension? If it’s years away, it may be the last thing on your mind right now—you’ve just landed the dream job and your head is filled with anything but retirement, buying your first new home, or starting a family. Retirement seems like a long way off.
If the last few years have taught us anything it is, we have no idea what the future holds, but a little preparation goes a long way when it comes to planning your retirement. The earlier you start saving, the longer your pension pot will have to potentially grow in value. That leaves you free to focus on what matters, whether that's hobbies, holidays or just some well-deserved rest and relaxation
Did you know that only Two-thirds of workers have some form of private pension savings, according to new data published by the Central Statistics Office.
We all know some sort of fear can be a good motivator to get a person into gear.
The state pension is liveable if you are very frugal and are happy to forego the regular holliers and the restaurant trips , if you are among the 60% that have a plan then excellent but if you fall into that 40% who doesn’t read on for a few facts that might just get you in gear.
1. State Pension
The Current State Pension State (Contributory) is €13500 per year (or €259.61 per week) as of Nov 2022. The State pension increases by €10 per week for those over age 80. Some people do not receive a full State pension because they have not been credited with enough PRSI contribution payments.
If you are on the average Irish wage of €45k a year this represents a big step down for many in full time employment, certainly something that may scare the life out of you.
Let’s be honest we all do it, who hasn’t said I will start on Monday or left the Christmas Shopping till the last minute (I know I have), but when we are talking pensions there is a lot more on the line.
The earlier you start your pension pot the better. Starting early is a smart move as your money will have more time to work hard for you (higher returns). Remember Compound Interest from School, well this is the same, the longer your money is building up in your pension pot the higher the return. Score!
Quick lesson on how this works your money is invested in a pension fund according to your risk profile, this is super important always make sure wherever you are setting up your fund you take a risk profile questionnaire. There are three types of funds low risk, medium risk, and high risk,
For example you start saving €3000 a year at age 21 your money and interest will start building in your account, in the first year you will accumulate €210 investment returns, in the second year your returns will have doubled to €430 approx. can you see the trend here? (Based on growth of 6% per year)
What does this all mean
The earlier you start the better, if you start in your twenties your savings could be worth more than someone who starts in their thirties (even if they save for 40 years) The math's really show the importance of catching this bandwagon as soon as you can. Do something today that your future will love you for.
4. How much do I need?
They say (whoever they are) as a guide you should plan to save enough to live on 50% of your income, to meet this if you are on a wage of €45k you will need to save approx. €280,000 by retirement.
That is a serious chunk of change!
Again, the earlier you start your pension planning, the more future you will profit.
5. The tax man!!
You may be saying to yourself ah I will just save my money but bear in mind the low costs and high return of saving into a pension plan compared to under the mattress are huge.
The main benefits are that your contributions are tax free! If you are on the 40% rate of tax you will only pay €150 for every €250 contribution you make, if you are on the 20% rate you will pay only €200 for every €250 contribution.
What you need to know about PRSAs
A Personal Retirement Savings Account, or PRSA, is a pension plan that you own yourself. It’s a contract between you and your pension provider. It is a flexible and portable pension that you can bring with you if you switch jobs - one of its major advantages is it moves with you.
If you are working for a company and they have a pension scheme in place, then go for it sign up as soon as you can.
Usually with a company pension the employer can contribute to your pension pot as well as yourself, making it better again!
You can also top up these pensions with Additional Voluntary Contributions (AVCs)
You will still get your tax relief on your contributions and on the contributions into your AVCs.
If you are a company director, you can fund your pension completely from the company getting you the 12.5% tax relief on your premium and your whole contribution from the company is like non-taxable extra wages.
This is a great wealth extraction scheme and a brilliant way to build your pension pot.
The moral of the whole story though is start building your pension pot now, you will be glad later, trust me.
I left my last job, where is my pension?
Your pension normally stays with your last employer however you have two options,
Transfer your funds to a new company pension scheme if they have one.
Take over the fund value of your old scheme into what is called a buyout bond. This is simply a pension that is now in your own name with your own provider and your own choice of funds.
The good thing about both options above is you know your money is safe and you have no fear of the old company going under.
I want to retire now?
Congratulations you have finally decided to take things easy after all your hard work. If you have a company pension scheme you can decide to take your retirement options from age 50 on.
As a rule of thumb, you can take 25% of your fund tax free into your pocket and then set up a regular monthly pension into your own bank account, however this can be taxable so make sure to get some advice.
I am of course generalising here as most people will have one or two or even three different pots to pull out of after switching employers etc.
For questions on retirement options in this case it is easier to contact us and we will be glad to help you through the process and make it easy for you.
For people with Personal Pensions the minimum retirement age is 60 years young and again the same process you have the option now of taking 25% tax free and the rest as monthly pension, however this can be taxable, so get some advice!