Saving for Retirement: What is a pension and how does it work?
Trade the word Pension for Retirement Fund
A pension will allow you to continue your quality of life post retirement. As we are all living longer than ever, it is important to be prepared. Do you know when you can afford to retire? Do you know what income you will receive post retirement? Are you unsure how a pension works?
A pension plan is simply a savings plan with tax relief.
Pensions are the only investment vehicle in Ireland that are allowed to grow tax free until draw down. If you are not contributing to a private pension, you are leaving money in the hands of Revenue. Savings on deposit are lodged AFTER tax and offer very little growth potential.
Revenue sets limits to the amount of tax relief on pension contributions based on your age (allowing for higher contributions as you near retirement). The limits are generous and most people do not meet their limit. Current limits can be found at The Pensions Authority.
While it is impactful to begin a pension early, it is never too late to start.
Regular contributions can add up to more than you may realise. Try this Pension Calculator to see where you stand.
It is important to regularly assess your circumstances and adjust as necessary to meet your goals.
How does a pension work?
You decide how much you want to contribute and which funds to invest in.
If you are at the top tax rate, €120 from your pocket + €80 from Revenue = a €200 contribution to your Pension Plan.
You can increase, decrease or pause contributions as your circumstances change.
You can change funds at any time.
A qualified adviser will help you decide how much to contribute and which funds are appropriate for you.
There are a myriad of funds available suitable for those seeking security, to those willing to exchange risk for growth.
Your adviser will regularly report on your funds and work with you over time to achieve your retirement goal(s).
Generally, you begin in higher risk funds and slowly de-risk as you approach retirement.
As pensions are a long term investment, you don’t have to watch the market’s every move as you will have many years to recover from any down turns. e.g. Zurich’s Balance fund recently turned 30 years old and has an annualised investment performance of 10.1% since its launch in 1989, fund fact sheet here.
FAQs
IS THERE A MAXIMUM PENSION FUND I CAN HAVE?
Depending on the type of pension arrangement you have, there will be limits as to how much you can contribute to your pension plan. However, in all cases there is an overall standard pension fund threshold of currently €2 million.
WHEN CAN I CLAIM MY PENSION?
Generally, if you have a Personal Pension you can take your benefits from age 60. You do not have to retire to take your pension benefits.
If you are a member of an Occupational Pension Scheme, you may be able to take your benefits at any time after your 50th birthday.
WHAT HAPPENS IF I RETIRE EARLY DUE TO ILL HEALTH?
If you have to retire early due to ill heath you may be able to take your pension benefits as soon as that happens.
What is the State pension?
From March 2019, the State pension in Ireland for a person aged 66 or over is €248.30 per week. The State pension (contributory) is paid to people from the age of 66 who have enough Irish social insurance contributions. It is not means-tested, you can have other incomes and still receive the State pension.
Is everyone entitled to the State pension?
To qualify for the State pension you must have a qualifying number of Irish social insurance contributions. You can check to see if you qualify here.
Author: Rachel O’ Shea, Protection Manager
Additional Queries? Email Rachel, roshea@olearylife.ie