Starting a pension is incredibly important, but it’s so easy to ignore particularly in our youth.
Essentially, you are investing in your future post-retirement to ensure you have enough money to maintain your lifestyle. The future can seem a long way away and the hope is that your personal circumstances will change significantly before retirement. However, this rarely happens without you making a change, so that’s why we recommend starting your pension today!
For most people, the simplest change available is to start paying into a pension fund as early as possible. But there isn’t really a “too late“ scenario with pensions. No matter where you are in your life journey you can make an impact on your future retirement income by planning ahead.
The following will lead you through your options at all stages of life and help you to understand the pensions landscape and where you fit into it. Retirement can be the most exciting part of your life – if you plan to make it so.
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Types of pensions
Understanding the different types of pension products available will help you understand what suits your situation. Even if you are not employed by a company that offers a pension scheme you can pay into a personal scheme. The most common pension types are PRSAs, company pensions and executive pensions. There are schemes best suited to self-employed people also.
What is a Company Pension Scheme?
These are the most commonly understood pensions schemes. They are managed by your company or employer on your behalf and payments are made by both you and your employer. They are also known as occupational pension schemes. The benefits from a scheme such as this will be based on your final salary, your average earnings throughout your career or the value of your pension pot at retirement age.
There are generally two types of company scheme:
What is a Personal Retirement Savings Account (PRSA)?
A PRSA is a private savings investment account you use to save for retirement. It’s usually chosen by an individual because they don’t have a company pension with their job or because they want to have an additional pension scheme as well as their company pension. You can have as many pension schemes as you want or can afford. They are available from authorised financial institutions such as insurance companies.
The value of your PRSA pension pot is dependent on the contributions you make into it and the investment risk your policy engages with. Employers can also make contributions to a PRSA, although it is less common. A PRSA also allows you to make lump-sum payments to increase its value. These are often tax deductible or come with significant tax benefits. As with most pension schemes, the contributions are invested in low or high-risk funds to realise benefits. You will make choices around the amount of risk you wish to take on with your pension.
Does a PRSA suit a self-employed person?
Yes, many self-employed people maintain a Personal Retirement Savings Account. A PRSA is often favoured because it is flexible and you can increase, decrease or stop payments as you need. Other types of pensions scheme aren’t as flexible and ready to respond to changes in your income over your career. If your career does change and you return to working for a company your PRSA is portable and you can bring it to your new job or transfer it to a new PRSA scheme without charges or penalty.
What is an Executive pension?
A third type of pension is an Executive Pension. This is set up by a company to help the owners and directors of a company to save for retirement. It is usually setup by a limited company and focuses on tax efficient ways of saving for retirement for the directors and owners of the company. The main difference between an executive pension and a PRSA, for example, is the amount of your salary that you can contribute to your pension fund and still receive tax relief. An executive pension allows a much higher percentage of salary to be used as a contribution than other types of pensions.
Reasons to start a pension
Pensions are one of the most tax-efficient ways to save for your retirement. There are benefits awarded to all pension scheme members to facilitate growing a pension pot for your retirement, create tax relief on contributions and offer the opportunity for a tax-free lump sum when the scheme matures.
A company or private pension will also help you maintain your lifestyle in retirement. As people are living longer it is more important than ever to plan to be able to afford your lifestyle after you stop working. While people will be entitled to the state pension, it’s important to remember that this is very limited, paying only around €250 per week. For many people, this would not be enough to cover their normal cost of living, and so, a company or private pension can be used to make up the shortfall.
To reap the best rewards, you need to plan carefully to maximise the benefits that each pension scheme affords.
How to start a pension
Step 1: Understand how pensions work and why they’re useful
Pensions appear very complicated on first viewing and, often due to a reluctance to plan for the end of your working life, many people fail to engage with them properly. By researching your options and accepting that planning now will pay off in the future, you can make a significant difference to your income post-retirement.
The best thing you can do to get started is to gather together your salary history (payslips, PRSI number, contracts) and speak to your HR department about the pension opportunities within your company. If the company you work for doesn’t have a pension scheme of its own there are still ways in which they can contribute to private pension arrangements you make.
An alternative to a company pension is to take a private pension with one of the many financial institutions, such as insurance companies, that offer them. To begin this process its advised to speak with a trusted financial advisor.
Step 2: Meet with a trusted Financial Advisor
Pensions are highly regulated and can only be offered by authorised financial institutions. Choosing which one to work with can be a complicated decision in itself. Taking advice from an independent financial advisor will help you understand the difference between providers and which suit your career and lifestyle best. This service is usually free and will allow you to personalise your options and find the best pension plan for your situation.
Step 3: Conduct market research to find the best option for you
As with any significant purchase, you need to research your options. Your financial advisor will be able to give you the information you need to evaluate different pension products and the organisations that offer them. They will be able to help you choose a pension scheme and a provider that suits your lifestyle and financial ambitions.
Step 4: Decide on the level risk you are willing to take on
Pensions are broadly invested in a number of key sectors or classes, including property, bonds, equities and cash.
Equities are bought and sold on the stock market and represent shares in companies.
Property investment is more easily understood as it involves bricks and mortar buildings.
Cash investments are all about earning short-term interest on cash deposits and are favoured by those seeking easy access to their investment.
Government bonds and other bond types are a more stable long-term investment option.
Each fund type carries a certain amount of risk. When you are choosing your pension you will be able to choose the level of risk you wish to engage with.
Pensions are legislated for under European Union law. The EU publishes a numbered scale, currently numbered 1 to 7, that represents the level of risk your pension scheme is engaging with in its investment management. Funds with a higher risk (up to 7) represent funds that usually pay greater dividends but are at a much greater risk of losing value. Those with a lower risk (starting at 1) represent fund types that usually pay lower dividends but are less likely to put your ultimate pension value at risk.
The type of investment that your pension is invested in is not something we have to actively manage – the scheme trustees and management do this on our behalf. But it is useful to have a better knowledge of where your payments are going and how they are likely to perform.
Step 4: Decide on the level risk you are willing to take on
Working with your financial advisor you will be able to devise an investment strategy that matches your goals for retirement. You may choose to open a Personal Retirement Savings Account, for example, as it is a flexible, transferable and responsive arrangement that can change with any fluctuations in your career. Alternatively, if your company offers a contributory pension then this may be the best strategy or you. Many people with a company pension choose to also open a PRSA so that they have more than one source of income in later life.
Step 6: Annual pension review
It’s important to keep up to date with your pension arrangements and review them annually. You can read more about this here.
Is a state pension enough to live off?
The State pension is around €253.30 per week. It’s based on PRSI payments throughout your working life and is intended to be a basic income in retirement. For many people, the value of the State pension is not enough to cover their needs. Some, particularly those who own their own home without a mortgage and have savings, can manage to live on the State pension but it offers little luxury to your lifestyle. Most people require a secondary source of income.
Your pension contribution is normally a percentage of your salary. If you are on a contributory pension your company will have a set percentage that they will match with an additional company payment. These payments are tax deductible. The value of that tax deduction changes depending on your age. For those under 30, for example the tax deduction could be around 15%. By the time you reach your 40s or 50s that tax deduction percentage could have grown to 30-35%
The actual mount you can contribute to a pension pot is capped on an annual basis with a maximum of around €115,000 the current annual limit.
Is it too late to start a pension?
Regardless of your stage in your career it is important that you explore your pension options. Pensions are maximised by those who start early and continue to pay into their pension throughout their career. However, if you take a break from your pension payments for a period, such as when raising children, or start your pension late there are still significant benefits to be made. Seek advice from a pension advisor on the factors affecting your specific circumstances. They will be able to offer you the very best options.