In simple terms a pension provides the money that you will live on when you retire. That means the money that will replace your income from working. A pension is a type of savings plan that allows you to save money for your future in a tax efficient way.
What are my pension options?
There are a number of different types of pensions – personal, PRSA, occupational scheme. There is also a new auto enrolment workplace pension scheme due to be launched in 2023. Which type you can use to save for your retirement depends on a number of different factors and a financial advisor can help you understand the options.
How is a pension tax efficient?
There are three unique tax benefits that apply to a Revenue Approved Pension Plan that are not available elsewhere:
Tax Relief on Contributions – The contributions you make to your Pension Plan, within certain limits, are allowed in full as an expense against your income tax. In simple terms, for a top rate taxpayer, each €1000 contribution to your plan reduces your tax bill by €400!!
Tax Free Growth – The investment growth achieved by your contribution is allowed grow completely tax free. This compares with most personal investment vehicles such as deposit accounts and personal savings accounts where any growth is subject to a tax charge as high as 41%
Tax Free Lump Sum on Retirement – On reaching retirement age you can take a large slice of your accumulated Pension Plan as a tax-free lump sum. This can be 25% of the value or up to 1.5 times your taxable income, depending on the type of Pension Plan you have.
Why do I need to think about investment funds?
A pension is a product that uses investment funds to make the most of your money. The investment funds you select will be important depending on the stage you are at. A pension is regarded as a longer-term investment and some risk can be taken. If you are starting later then you will need a more cautious strategy. Many fund managers offer a pension lifestyle strategy. This simply means that how your pension is invested is automatically adjusted. This is done by moving into lower risk funds, as you get closer to your selected retirement age.
We all have a general idea of what we would like to do in retirement. It might be travelling, spending time updating your home or taking up a hobby. However, in order to make those plans a reality we need to ensure we have the financial resources necessary. Relying solely on the State Pension (which is currently €253.30 per week) certainly won’t allow you to do very much.
While your retirement may seem like a long way off, the sooner you start saving for it the better. It’s important to make sure there’s funding in place to help you enjoy those years. With generous tax relief and a lot of investment options, there’s no reason why not to start a pension.
Whether you’re just starting work or are mid-career, just get in touch . We would be happy to have a chat about your options.