As we are now entering the so called 'Pension Season', I’m sure you heard the TV and Radio ads asking you to speak to your 30-year-old self etc. It is a subject that most of us don’t like to think about as it requires some planning and thought.
Also because of volatility in the various world economies there is a degree of uncertainty around investment markets.
I still feel though that it is a worthwhile to look at whether or not contributing to a pension still makes sense.
Pensions have received a lot of negative media attention in recent years due to issues such as poor performance, the pension levy etc. Let’s take a few minutes to cut through the noise and look at the reasons why contributing to a pension still makes sense.
What will the state pension be in the future?
The State Pension (Contributory) is currently €248.30 per week, but what will it be by the time you get to retirement?
Significant demographic changes in Ireland is putting pressure on government finances as the cost of state pensions and health care for the elderly increase.
There are currently six adults of working age for every pensioner, but by the year 2050 this ratio is expected to be 2 to 1.
What’s even more worrying is that the state pension is financed on a pay-as-you-go basis out of PRSI contributions plus government top ups.
The National Pensions Reserve Fund which was set up to help meet the costs of these pensions from 2025 onwards has been severely depleted as it was used to recapitalise the banks in 2009. Simply put, you cannot be sure the State will provide you in your old age with the same level of pension income that is provided currently.
State pension age increasing
Legislation is now in place that will increase the age at which the state pension becomes payable in the future. Currently the age where somebody receives the state pension is 66. However, If you’re retiring after 2021 then it will be age 67, worse again, If you’re retiring after 2028 then it will be age 68.
Life expectancy for those born in Ireland is now 78.4 years for males and 82.8 for females (Source: CSO 2013). While increasing life expectancy is a good thing, it is also something you need to consider when planning for retirement.
If your retirement fund is to last longer you will either need to set aside more, or take a lower income each year in retirement. Your retirement savings may need to last for up to 30 years after you finish working.
Income tax relief
Income tax relief is still available on contributions made personally to a pension. This relief is available on up to 40% of the contribution for a top rate tax payer, or 20% for a standard rate tax payer.
For a higher rate tax payer, this is equivalent to the government topping up your net pension contribution by up to 69%! In addition to income tax relief on any personal contributions, employer contributions to a Company Pension are also tax deductible and no benefit in kind is appropriated to the employee.
Tax free retirement lump sum
Tax free retirement lump sums are available when taking retirement benefits. You can take 25% of your pension fund as a retirement lump sum or with a company pension you can instead choose to take a retirement lump sum of up to one-and-a half times your final salary, depending on the length of time employed. The maximum total tax-free amount is €200,000. A retirement lump sum of between €200,000 and €500,000 is subject to standard-rate income tax, currently 20%.
Tax free growth
Exit Tax on savings and investment funds is 41%. DIRT is 35%. Capital Gains Tax is 33%. Pension funds are exempt from Irish income and capital gains taxes… need I say more.
Pensions allow for a wide range of investment options to suit the risk appetite of every client.
This includes investments in equities, bonds, property and also deposits, trackers and other secure options. Different currencies such as Euro, Sterling or Dollar are also available.