Planning Your Retirement

Essentially how much you have in your pension fund on retirement depends on:

• How early you started setting money aside,
• How much you paid each year
• What type of investment fund you used, and
• When you eventually retired.

Because everyone has a different set of personal circumstances the result of mixing everyone’s individual response to these four issues will generate a different fund. As a rule of thumb, the earlier you start contributing to a pension fund the more time there is for compounding of investment returns irrespective of how much you contribute. And the more you contribute, the greater the fund should be especially if you retire later in life rather than at the earliest possible date. Finally, the best long term investment fund is likely to be one that invests in international equities or property. While both of these will have volatility in pricing an equity fund will be easier to convert to cash and therefore will provide the flexibility of being more flexibility if an earlier retirement date is needed. This being said short term volatility can see underlying fund values fluctuate considerably. The Covid 19 crisis saw investments fall by circa 35% in the six week period of mid February 2020 to 23 March 2020. This was then reversed over the next 10 weeks.

As a broad rule of thumb someone starting a pension at age 30 and targeting 2/3rds of their final salary at age 65 would need to contribute 15% of their salary assuming a 5% p.a. investment return. The shorter the contribution term i.e. later starting age and earlier retirement age would necessitate a higher contribution level.

While a pension plan, organised through an insurance company or a specialist pension trustee company, is usually the main method of saving for retirement it is important to understand that everybody needs access to money in their later years irrespective of the source.

Pension plans are tax efficient in that pension contributions are tax deductible against either personal income tax or corporation tax (depending on who is paying the contribution), the accumulated fund grows free of any taxes and the retiring person can then get a tax free lump sum at the point of retirement.

The main drawbacks are that one cannot access the pension fund until normally age 60 (although earlier access from age 50 is allowed in specific circumstances) and once claimed any future income following the retirement claim is subject to income tax in the same way as other income is taxed.

As part of prudent financial planning we would always recommend that our clients have ready access to an emergency fund in the form of cash deposits or An Post products such as Savings Certificates, Savings Bonds or Prize Bonds. Once the “Rainy Day” easy access monies have been catered for we would advocate the use of stock market related investments provided they are low cost, have immediate access and are well diversified. Individual property holdings is another way of getting diversification but in our experience once a person has retired, performing landlord functions eventually becomes an onerous task as an individual gets older.

There are two types of State Old Age Pensions available, Contributory Pensions and Non Contributory Pensions.

A Contributory Pension is currently paid to those who have reached the age of 66 but older minimum ages will apply in the coming years increasing it to age 68 by 2028. The payment levels are linked to the amount and Class of PRSI contributions that you have paid during your working life. The maximum standard amount for a contributory pension is €248.30 per week but this may be reduced if you have lower levels of lifetime contributions.

If you are not entitled to a Contributory Pension then you may be able to claim a Non Contributory Pension for which you will be means tested. The maximum Non Contributory Pension is €237 per week.

In both cases additional sums are payable if you have either a dependent spouse or children or live alone.

If you are, or become a widow or widower, there are separate Widow(er)’s Pension entitlements

A Contributory Widow(er)’s Pension is available to Widows or Widowers where sufficient PRSI contributions have been made and the weekly rate payable is age dependent, namely:

• Under age 66 - €208.50 per week
• Aged 66 to 80 - €248.30 per week
• Aged over 80 - €258.30 per week

A Non-Contributory Widow(er)’s Pension is means tested and could be worth as much as €203 per week.