Preparing for Retirement
18 July 2023
Financial expert Paul Merriman’s ultimate guide to Retirement planning in Ireland.
Planning for retirement is a crucial aspect of financial management, and gaining a comprehensive understanding of key pension terms is essential for making informed decisions. Recent research commissioned by An Post Money found that financial planning for the future has taken a back seat with a sharp focus instead being placed on managing escalating day-to-day living expenses. Paul’s stance is that while something may be of less importance right now, financial elements that are on the back burner can often become a big priority in five or ten years so its important to have a solid plan in place, without losing sight of it.
In this article, we will:
- Explore the top 10 need-to-know pension terms
- Shed light on contributory and non-contributory pensions
- Identify the best savings options available in the Irish market
Top 10 Need-to-know pension terms
- Personal Retirement Savings Account (PRSA): A PRSA is a pension plan that individuals can contribute to throughout their working life. It is a portable pension, meaning it can be transferred between different employers.
- Occupational Pension Scheme: An occupational pension scheme is a pension plan set up by an employer to provide retirement benefits for its employees. It can offer valuable benefits such as employer contributions and tax advantages.
- State Pension: The state pension is a government-funded pension scheme designed to provide a basic level of income in retirement when an individual reaches the state pension age. The state pension age is currently 66.
- Contributory Pension: A contributory pension is a type of pension where the individual makes regular contributions throughout their working life. These contributions are typically deducted from their salary and are invested to accumulate funds for retirement.
- Non-Contributory Pension: A non-contributory pension, also known as a state pension, is a retirement benefit provided by the government to eligible individuals who have not made any pension contributions. Eligibility criteria vary and are usually based on factors such as age, residency, and means testing.
- Additional Voluntary Contributions (AVCs): AVCs are optional contributions made by individuals who wish to enhance their pension benefits beyond the standard contributions. AVCs provide an opportunity to increase the retirement income and enjoy additional tax relief.
- Defined Contribution (DC) Pension: A DC pension is a type of pension where the contributions made by the individual, employer, or both are invested, and the final pension amount depends on the performance of the investments.
- Defined Benefit (DB) Pension: A DB pension is a type of pension where the benefits received during retirement are predetermined based on factors such as salary, years of service, and a specific formula provided by the pension plan.
- Annuity: An annuity is a financial product that provides a regular income stream in exchange for a lump sum or regular contributions made to the annuity provider. It can be used to provide retirement income.
- Tax Relief: In Ireland, individuals receive tax relief on pension contributions. This means that contributions to pension plans receive tax benefits, such as tax relief at the individual's marginal tax rate, which can help increase the overall value of the pension fund.
Tax relief for employee pension contributions is subject to two main limits: A) an age-related earnings percentage limit. B) Total earnings limit.
Age-related earnings: percentage limits for tax relief on pension contributions
You can get tax relief up to the relevant age-related percentage limit of your earnings in any year. You might have more than one source of income. If you do, this relief is only from the source of income in respect of which the contributions are made.
|Age-related percentage limit for tax relief on pension contributions
|60 or over
For example, an employee who is aged 42 and earns €40,000 can get tax relief on annual pension contributions up to €10,000.
Total Earnings Limit
The maximum amount of earnings taken into account for calculating tax relief is €115,000 per year.
Types of Pensions available in Ireland
In Ireland, there are two main types of pensions: contributory and non-contributory pensions. Here's a breakdown of the differences between the two:
||A contributory pension is a type of pension where the individual makes regular contributions throughout their working life.
||A non-contributory pension, also known as a state pension, is a retirement benefit provided by the government.
||Contributions are typically deducted from the individual's salary and are invested to accumulate funds for retirement.
||Individuals do not need to make specific pension contributions to qualify for a non-contributory pension.
||To qualify for a contributory pension, individuals must have made the necessary social insurance contributions, including Pay-Related Social Insurance (PRSI) contributions.
||Eligibility for a non-contributory pension is based on factors such as age, residency, and means testing.
||The amount of the contributory pension is based on the individual's average yearly PRSI contributions and the number of qualifying years.
||The non-contributory pension provides a basic level of income in retirement for those who meet the eligibility criteria.
||Contributory pensions are not subject to means testing, meaning they are not affected by an individual's income or assets.
||Non-contributory pensions are means-tested, meaning they are subject to income and asset assessments. The amount of the pension may be reduced or discontinued based on an individual's means.
||Contributory pensions may provide additional benefits such as a spouse's pension, which is paid to the spouse or civil partner of the pension recipient upon their death.
||Non-contributory pensions may also offer a spouse's pension, ensuring financial support for the spouse or civil partner upon the pension recipient's death.
It's important to note that the eligibility criteria, contribution requirements, and benefits for both contributory and non-contributory pensions may be subject to change. It's advisable to stay informed about any updates or amendments to the pension system by consulting official sources or seeking advice from a financial advisor or pension expert.
What are the best savings option for pensions in Ireland?
Determining the best savings option for pensions on the Irish market depends on your individual circumstances, risk tolerance, and retirement goals. It is advisable to consult with a financial broker who can assess your needs and recommend suitable pension products. Some options available in Ireland include Personal Retirement Savings Accounts (PRSAs), Occupational Pension Schemes, or Self-Invested Personal Pensions (SIPPs). A financial broker can provide personalised guidance to help you choose the most appropriate option for your retirement planning.