Planning Early for Retirement: Pensions is a Young Person’s Game
Planning Early For Retirement!
So, should young people worry about pensions and planning early for retirement?
The short answer is – No.
Instead of worrying, which solves nothing and causes bad health anyway, they should plan.
Pensions are mostly thought of as a savings plan for older people but in reality, they are a young person’s game. The younger you start the more savings you have built up by the time you want to retire.
However, because so much of the language that is used to describe and explain pensions is confusing, pensions can be a turn-off to the very people that really do need to know what they are, how they work, and how planning early for retirement can offer real benefits.
Why they matter
Pensions really do matter to each of us. This is more so because of a raft of changes that have taken place over the last two decades.
To begin with, medical experts predict that we will all live longer.
Whether it is as a result of taking better care of our bodies, advances in medical research, or innovations in pharmaceuticals, people are living longer.
And this points to a longer time frame in post-employment. So, more to enjoy your later life.
So, how young is too young for a pension?
Are You Too Young for A Pension?
Starting out in your first job can be pretty daunting. Your salary sounded like a sweet deal when you signed up, but now each month you’re left feeling as though you’re scraping for change as your income disappears on tax, rent, bills, credit card repayments… And that’s before you add in all those extras, like that gym membership you keep promising yourself you’ll use and the smashed avocado on toast you ordered for brunch last Saturday, washed down with two skinny lattes.
With a bank statement already flooded with direct debits, the idea of losing even more money each month to the vague and far-off concept of a pension can seem particularly unappealing at this early stage of your career. Why worry about something that’s decades away? Surely, it’s an unnecessary cost compared with your more immediate plans, such as taking a trip around the world, buying a property, or getting married, to suggest but a few.
It’s saving not spending
But contributing to your pension is not just another way to burn through your paycheque every month. In fact, by paying into a pension, you’re saving your money to use at a later date. And, if you’re paying into your workplace pension scheme, your employer will also usually add in some money, which is in addition to your salary. Money kept in a pension scheme is invested with the aim of helping it to grow over the years to fund your retirement. So, for most people, joining a pension scheme is a great idea. But…
Are you too young?
There is simply no such thing as being too young to contribute to your pension – it’s a case of the sooner, the better. The longer you spend contributing to your pension, the more money you will have saved by the time you have retired. If you start saving at a younger age, you can also contribute a steady amount each month and avoid desperately scrabbling around for as much money as possible in your forties, when you realise your retirement is looming. Of course, when you first start out on the career ladder you may not be able to afford to contribute much to your pension – but a little each month will go a long way, and you can build up your contributions as your career progresses. There are plenty of helpful pension calculators available online that can help you decide how much money you should tuck away each month so that you can live comfortably when you retire.
As an example,
If you pay €150 towards your pension each month from age 25 to 65, and your pension money grows at around 5% per year, you’ll retire with a pension pot of €223,285. Start paying €150 per month at age 40, however, at 5% a year growth, you’ll be left with €88,218 by the age of 65.
That’s a big difference. This example does not take into account any charges or taxes that apply to pensions, and the actual growth rate can be lower or higher.
Planning early for retirement
More time to take risks
If you start to make pension contributions while you’re young, you can take advantage of the lengthy time frame by choosing riskier investments, such as shares, as they will have more time to ride out stock market highs and lows, and could potentially make you more money in the long run. As you approach your retirement, you can switch to safer investments, such as government bonds, and continue saving at a steady pace. Some pension schemes will even do this for you automatically. We as financial advisers can explain the different pension schemes and the different investment options available to you.
If you are lucky enough to receive money from any relatives (for example, a savings account set up by your grandparents), you should consider the idea of putting all or some of this money towards a pension fund. You will reap the benefits, and the money will be stored away until your retirement (guaranteeing you aren’t tempted to delve into it from time to time). This might not seem like the most creative and fun way to use this money, but if you don’t need it for anything in particular at the moment, then your retirement is an excellent investment.
How to get started planning early for retirement
If you want to find out more about pensions, we can give you information about your options.
As soon as you can afford it, it could be a very positive move to start contributing to your pension. Just consider it as another small cost you need to budget for each month. Even swapping your daily barista-made cappuccino for a home-brewed blend could give you enough of a budget to start. After all, €3 a day is €21 a week, or €84 a month. And contributing just €84 a month to your pension fund early in your working life could set you up for a more secure future.
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Whilst online calculators are a useful tool, we recommend speaking with a Pension Advisor to help plan how much you should or could contribute to your pensoin. Online calculators can’t take your individual circumstances into consideration. Therefore may not give a true calculation.
Talk to us now and make an appointment with one of our Letterkenny team of QFAs. We are here to help with your Financial Planning Concerns. Ask us questions on Retirement & Pension, Life Insurance & Protection, Mortgages, and Investment Advice. Get in touch here or give us a call at 074 91 03938.
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Personal Pensions FAQ’s
Am I eligible to take out a Personal Pension Plan?
As income tax relief is available on contributions into the plan, up to certain limits, you must meet certain conditions to be eligible to take out a personal pension plan.
- You must be legally responsible for paying tax in Ireland. (This means Irish tax is due on any profits or earnings you make.)
- Your income must be ‘earned’ – this means that you can’t use money you’ve made from rent, dividends from shares and stocks, or returns you’ve made on investments. Basically, you can only use the money you’ve earned from your employment.
- To be eligible to take out a personal pension plan, your income must be taxable under Schedule D (case I or II) or Schedule E if you are in ‘non-pensionable employment’. Schedule D (case I or II) income is profits from a trade or profession, and usually applies if you are self-employed or working as a sole trader. Schedule E income includes earnings from employment and benefits-in-kind. ‘Non-pensionable employment’ is where you work for someone else but there is no pension scheme for you to join
How much should I invest in my Pension Plan?
The amount of money you should invest in your pension plan depends on:
- your age.
- how much money you want when you retire;?
- what benefits you’ve already built up; and
- when you’d like to retire.
If you want to retire quite soon with large retirement benefits, you will need to contribute more than someone who has longer to go to retirement and who doesn’t want as much. The Government has set certain limits for income tax relief purposes. Your adviser will be able to recommend a level of funding based on your needs. Income tax relief is not guaranteed.
How do I claim income tax relief?
If you are an employee and your personal contributions are taken from your bank account, you can apply on your MyRevenue account and apply to have your tax credits adjusted to reflect your pension contributions. If you are self-employed, you must include your pension contributions in your self-assessment tax returns to get income tax relief. Your accountant or bookkeeper can do this for you. Income tax and other tax will be due on any pension income you receive when you retire.
Are there any age restrictions on a personal pension plan?
What happens after I apply for my plan?
After your application has been assessed, you will receive
- your terms and conditions booklet, which outlines the standard terms of your contract with your provider,
- and your plan schedule and customer information notice (which outlines the specific details of your particular investment).
It is important that you read the details of your plan to make sure it meets your needs. Remember that a pension plan is a long-term commitment.
What happens if I take out a personal pension plan and then I am no longer eligible?
If you are working with an advisor this should not arise but if it, does you will no longer be eligible if you do not earn an income that is taxable in Ireland or if you move into a pensionable job. That is where your employer has an in house pension plan. If this happens, you can continue contributing but cannot claim income tax relief. If you move into pensionable employment, you should contact your advisor as it be best to stop payments into your Personal Pension. But do seek advice.
What is the minimum term?
The minimum investment period for regular contribution plans is two years. There is no minimum investment period for bond plans.
How can I pay?
You can choose to make regular contributions. You can pay by direct debit (every month, every
three months, every six months or every year), or by cheque every year.
You can also invest a lump sum at any time. You can do this instead of, or as well as, making regular contributions. If you start off with just a one-off contribution, you can’t add regular contributions at a later date.
Can I change my contribution level?
Yes. You can increase your contributions at any time. You can also reduce your contributions to the minimum allowed or take a break from making contributions if you want to. However, you need to remember that reducing (or stopping) your contributions will affect the value of your pension fund when you retire.
To help you to decide whether you need to increase your pension contributions, your provider will send you a statement each year showing:
- the contributions you have made;
- the value of your fund; and
- an estimate of the pension you will receive when you retire.
We recommend that you review your retirement plan with adviser each year.
Can I protect my contributions against inflation?
Yes. When you take out your plan, you can choose to have your contributions increase with inflation. If you choose this option, your contributions will increase each year in line with:
- the Consumer Price Index; or
whichever is higher
Can I have more than one pension plan?
Yes, if you are eligible for a personal pension, you can have a number of plans. The Revenue Commissioners will add up all the contributions and you will get income tax relief up to a certain limit.
This graph shows the maximum contribution you can make, as a percentage of your earnings, for which you can claim income tax relief.
It is important that you get advice on the amount you should be paying into your pension. You should also learn about the amount of pension benefits that will be available to you when you retire.
Can I use my pension plan as security for a loan?
Do I have to pay tax on my pension?
Under current Irish law, when you retire you can take some of the fund as a retirement lump sum.
You will have to pay standard rate income tax on any retirement lump sums between €200,000 and €500,000. Any amounts over €500,000 will be taxed as income at your marginal rate. The USC, PRSI (if it applies) and any other taxes or government levies due at that time will also be taken.
You will have a number of options as to how you can use the rest of your pension fund, and how you are taxed will depend on which one you choose.
- If you choose to buy a pension for life (annuity), your income will be taxed as income in the normal way and will include any tax due at that time.
- If you have the option to invest in an Approved Retirement Fund, (ARF) you will have to pay tax on any withdrawals that you make.
Under current Irish law, the maximum pension fund allowed for tax purposes is €2,000,000. The relevant maximum will apply to the total of all pension funds you may hold. You will pay tax on any amount over this as a one-off income tax charge when you take it when you retire. Tax will be paid at the higher rate of income tax.
What is a personal fund threshold?
What happens if I have to retire early because of ill health?
If you have to retire early because of ill health, and you apply for and get Revenue approval, you can take your pension benefits immediately. However, your pension may be low because your contributions are stopping at an earlier age and the pension will have to last longer as you will be retiring earlier.
Can I take money out of my pension?
You cannot take money out of your pension before you reach 60 unless you have to retire early because of ill health. You can transfer your plan to another approved personal pension plan with another insurance company or to a PRSA.
FYI: Depending on the funds you have chosen, there may also be a delay in moving your fund. Check with your provider on this.
Do I have to retire to get my pension?
No< you do not need to retire to get your pension. You can take your pension at any time from age 60 and continue to work. You can retire because of ill health at any time. However, the Revenue
Commissioners must agree to you taking your pension and you must take your pension immediately.
What happens if I die before I retire?
Before age 75:
If you have a personal pension and die before your 75th birthday, the value of your pension fund will be paid to your estate. As with any inheritance, your dependents may have to pay inheritance tax on any benefits we pay them.
From age 75
If you do not take your retirement benefits, your personal pension will automatically become a Vested RAC on your 75th birthday.
If you leave the funds to your husband or wife or registered civil partner, they can transfer the funds to an ARF in their own name. In all other cases, the funds are paid to your estate. If your estate has to pay income tax; your provider must deduct this before paying the proceeds to your estate.
Generally, the amount that is left is treated as income for the year of your death.
There are a number of exceptions to this rule.
Income tax is not due if:
- the funds are transferred to an ARF in your husband’s, wife’s or registered civil partner’s name. However, PAYE is due on any future withdrawals.
- the funds are transferred for the benefit of your children who are under 21 on the day you die.
Income tax will be due at a rate of 30% if the value of your Vested RAC is transferred for the benefit of any of your children who are over 21 on the day you die. As well as income tax, there may also be capital acquisitions tax due on the value of your plan, if your Vested RAC is not paid to your husband, wife or registered civil partner or to any of your children over 21 years of age. The beneficiaries are responsible for paying this tax. Irish tax law changes over time and you should get independent tax advice on this.
Pension life insurance
The value of your fund may not be enough to provide for your dependants when you die, particularly in the early years when the value of the fund is low. Pension life insurance is life cover
that you can take out and which will pay your dependants a guaranteed lump sum if you die during the term of the plan. The advantage of this type of life insurance is that, if you are eligible, you can claim income tax relief on your contributions.
You should discuss this with your advisor
Can I cancel my plan?
Yes, you can cancel your plan. If you do this within 30 days from the date you are sent your Welcome Pack (or a copy), your provider will cancel your plan. They will refund any regular contributions you have made. They will arrange to return any single investments, less any fall in investment values during the period. They will return any transfer values, less any fall in investment values during the period and in line with Revenue rules. Before cancelling you should talk to your adviser. If, after taking out this plan, you feel that it is not suitable, you may cancel it by writing to your plan provider.
Family law and pensions
If you are involved in a judicial separation or divorce or dissolution of a civil partnership or ending of a relationship with a qualified cohabitant, a pension adjustment order may be granted by the court. There is no option to set up an independent benefit within this plan.
A pension adjustment order issued by the court will override the terms and conditions of your PRSA plan. This will direct your plan provider to pay all or part of the benefits under this plan when you retire or die, to any person named in the pension adjustment order.
If a pension adjustment order has been granted on your plan, you must let your advisor and or plan provider know. You can get more information on how a pension adjustment order works from your solicitor or from the Pensions Authority at the following address