We are an ageing demographic, with 800,000 of our citizens currently over the age of 66, and with an expected 1.8 million over this age in less than 26 years' time.
There are factors that challenge our assumption that we can support this ageing population - particularly if there is an Irish diaspora that plans to return home to Ireland to retire in the future.
Auto-enrolment is finally being introduced toward the end of 2024, while the current government has also introduced the notion of incentivising those who wish to delay their pension at age 66 by a year for a 4% higher weekly payment (this means you would want to live until at least age 92 to justify this decision).
John Lowe of MoneyDoctors.ie demystifies and simplifies what you need to know about pensions in five basic concepts.
1. The pension is the best investment in Ireland
If you are on 20% or 40% tax rate, for every €100 you invest in your pension the government give you back €20 or €40. This means you are up in your investment 20% or 40% before you start – obviously being on the higher tax rate makes it more advantageous. Take the average annual growth in the stock market over the last 30 years (1991 to 2020), which was 10.72%, this means that your investment, with the tax relief, exceeds 50% per annum – I know of no other investment that will give you that return.
2. The older you are the more you can contribute to your pension to maximise your tax relief.
If you are between 30 and 40 years of age, you could invest up to 20% of your net relevant earnings into your pension. e.g. €40,000 annual salary allows you to invest up to €8,000 per annum or €666.67 per month into a pension. Doing so will mean you will receive a tax credit of €3,200 annually or €266.67 per month, so effectively the pension is only costing you €400 per month. If you are over 40, the threshold increases to 25% of your net annual earnings, 30% when you hit the age of 50, 35% at age 55 and 40% at age 60.
With the new auto-enrolment which starts toward the end of 2024, the current government thinking is at the end of 10 years of contributions from both employer (6%) and employee (6%) plus a government contribution (2%), you can look forward to a maximum of 14% each year invested in your pension.
Today a 22 year-old, straight out of 3rd level college, can invest 15% on their own income into a pension and obtain potentially 40% tax relief on it instantly from year one.
3. Consider the pros and cons of an occupational pension versus setting up your own.
Occupational pensions (set up by your employer) generally have a Normal Retirement Age - NRA - of 65 (or 66 in some cases and for executives age 60), while setting up your own pension will allow you to access your fund at age 60 (Personal Retirement Savings Account - PRSAs).
With the retirement age being pushed out to age 68 from 2039 – only 15 years away – it means most tax payers will need to maintain employment until that age when the State Pension, currently €277.30 per week, kicks in.
However, the government has recently relented and given a benefit payment of €232 per week to those retiring at 65 for the year before the State Pension kicks in at age 66, plus for a dependent adult an additional weekly €154 and €46 per week to children under 12 years, and €54 per week to children over the age of 12.
Don’t delay, invest something into a pension.
4. Commuting your pension.
When you reach retirement age, your pension fund becomes accessible to you. Many people are unaware of what happens next or what the best option is for them.
At retirement age your fund is say €500,000. What now?
- You can take 25% tax free (€125,000)
- With the balance of €375,000, you can go two ways
Annuity
A set interest rate on the day of retirement that never changes. Current annuity rates are low (they are linked to bank interest rates) so at around 4%, your monthly annuity would be €1,250 per month for life.
- This is also taxable and generally only guaranteed for the first five years
- In the sixth year if you die the insurance company keeps the €375,000, not your family or estate.
Approved Retirement Fund (ARF)
- You choose where you want to invest (so even in retirement you still have to manage your fund to maximise returns)
- Once aged 60, you must take 4% annually (or in monthly payments of €1,250) called imputed distributions
- On reaching age 71, you must take 5% annually (or monthly €1,562.50)
- You can take up to a maximum of 15% each year without penalty but obviously reducing the fund faster and shortening the payment span.
- If you die, the balance of the fund goes to your civil partner or spouse as if it is their ARF. If you both die, the fund goes to your children, if there are children, but they pay a 30% tax on the fund balance. If no children, the fund goes to your estate for distribution according to the wishes in your Will.
5. Transferring your work pension to a Personal Retirement Bond.
Working in different companies means you may have a collection of pensions that you may have to wait to access until your NRA (Normal Retirement Age).
Those companies in the interim could go out of business, declare bankruptcy or liquidate. You will also need a trustee from your former company to sign off to access your pension on retirement date. You could have a problem.
This could be resolved by simply transferring that occupational pension into a Personal Retirement Bond. This has many benefits:
- You are now in control of the pension
- You can decide where it is invested
- At age 50, irrespective of your NRA, you can commute this fund:
- Take 25% tax free
- Transfer the balance into an annuity or an Approved Retirement Fund (ARF). You could also draw down up to a maximum 15% in total each year without penalty but obviously you will run out of funds much quicker.
It will certainly be worth your while to check out if your old pension can be transferred to a Personal Retirement Bond or Buy Out Bond.
There you read through it – well done! It really is in your best interest to start thinking pensions. Give me a call if you’re worried.
For more information click on John Lowe's profile above or on his website.
The views expressed here are those of the author and do not represent or reflect the views of RTÉ.
