WHO WILL LOOK AFTER YOU IN YOUR RETIREMENT?
The current state social welfare pension is €230.30 per week or less than €12,000 per annum.

At Financial Control, we can assist you to review your current situation.

We will outline the benefits available to you and identify what you must do to ensure you have a sufficient pension at retirement.

Your retirement may seem a long way off, but you still need to plan for it today. There are many types of pension plans including personal, executive pensions and PRSA’s all of which attract tax relief at your highest income tax rate. How much you need to start paying into a pension plan largely depends on how much time is left until you retire. It is therefore advisable to start planning for your retirement as early as possible.

The more you contribute in the early years will take less pressure off you to contribute in the latter years as your contributions will have more years to compound and growth.

The most suitable retirement plan for you will depend on your employment status. If you are:

Company director

An employee,

Self employed

Contract worker

Our experience and knowledge means we can recommend the retirement plan that best suits your needs.

Pension options through your employer:

·  Employer pension plans
An employer or occupational pension plan is one that is set up by an employer to provide pension and other benefits for employees. The main advantage of this type of plan is that your employer must make a contribution to it (except PRSAs), even though the amount may be small.

Your employer usually sets up the rules of the pension plan and appoints people called 'trustees' to look after it. Your employer automatically takes your contributions from your salary before working out income tax. So you get tax relief automatically because you don't pay tax on your pension contribution.

The income you get when you retire depends on whether your employer plan is:

    * a defined benefit plan; or
    * a defined contribution plan.

Ask your employer, HR Department or pension trustees for information on which type of pension you have, as there are important differences between the two.

Defined benefit plan

With a defined benefit plan, the pension income and/or lump sum you get when you retire is related to your final salary and years of service with that employer. For example, you might get a maximum of half or two-thirds of your salary after 40 years' service, including the state pension.

With this type of plan, you can predict your pension income, based on your salary and years of service. However, there is no guarantee that your defined benefit plan will not be changed by your employer for example, to a defined contribution scheme and this will affect the benefits you will get.

Defined contribution plan

With a defined contribution plan, you are not promised a percentage of your final salary when you retire. Instead, your pension income depends on the value of your pension fund when you come to retire. The value of your pension fund depends on:

    * the value of the contributions paid in by you and any paid in by your employer
    * the investment performance, or gains and losses, of the pension fund
    * the amount of fees and charges the pension investment company applies

Most employer plans and all personal pension plans and PRSAs are now set up as defined contribution plans. So the final value of your pension can only be estimated. When you retire, your pension may be less than you expected. So you need to examine the benefit statement that you receive each year from the trustees and regularly review your contributions.

Your employer's plan may allow you to make Additional Voluntary Contributions (AVCs), or buy back missing years, called Notional Service Purchase (NSP) through the group pension scheme.

·  Additional Voluntary Contributions (AVCs)
What are AVCs?

Additional Voluntary Contributions (AVCs) are contributions invested in a private pension arrangement to build up an additional retirement fund. At retirement, this AVC fund can be used to top up your pension benefits, within Revenue limits. Some AVCs also offer the facility to add additional death in service benefits for dependants.
Why would you want to consider AVCs?

AVCs can be considered where your pension benefits may fall short of the maximum benefits which you can get at retirement. This shortfall can arise in different ways, such as:

    * you want to boost the value of your pension fund;
    * you may not have the maximum 40 years service by your minimum retirement age. As pointed out already, you may be able to bridge this gap using NSP;
    * some of your earnings, e.g. overtime or various allowances, may not qualify for pension benefit purposes; and
    * if you joined the public service after 6th April 1995, your superannuation benefits are reduced to reflect your entitlement to the State Pension.

How AVCs work?

You decide the level of AVC you want to pay, within certain revenue limits, see the Revenue site for more information. Your AVCs are invested in investment funds, which typically invest in a mix of shares, bonds, property and cash. The value of your AVCs can rise and fall in line with fluctuating investment markets. You are not guaranteed any specific level of AVC fund or retirement benefits by retirement age, in return for your AVCs. At retirement, your AVC fund is used to top up your retirement benefits. You can decide how to use the fund, within certain restrictions.

Personal Pension Plans and PRSA's

Personal pension plans

A personal pension plan is a private pension policy that is managed for you by a life assurance company or investment firm. Anyone who earns an income but who can't join an employer plan or who is self-employed can start up one of these plans. If you are a member of a work pension but also earn money somewhere else you may be able to contribute to a personal pension plan.

You have to set up this type of plan yourself, arrange to pay your own contributions and claim tax relief yourself each year. You should contact Revenue for information on how to claim tax relief if you are employed, as your employer cannot usually make contributions to your personal pension plan. You can contribute to more than one personal pension plan. 
Personal retirement savings account (PRSA)

A personal retirement savings account (PRSA) is a type of personal pension policy that is more flexible than the traditional personal pension plan. Anyone up to the age of 75 can take out a PRSA and you don't have to be earning an income to do so.

If you are employed, by law your employer must offer you a standard PRSA if:

    * there is no employer pension plan in place through your job
    * you are not eligible to join your employer pension plan within the first six months of your service
    * you are eligible to join your personal pension plan but only for death-in-service benefits.

You can also set up a PRSA if you wish to make AVCs but are not able to do so through your employer's pension plan. If you contribute to a PRSA set up by your employer, you get tax relief automatically and don't have to claim it yourself. Your employer may also contribute to your PRSA but does not have to.

When you take out a personal pension plan or PRSA, you can change your mind within 30 days. This is called a ‘cooling off' period.
How much should you contribute?

All personal pension plans and PRSAs are set up as defined contribution plans. As a result, the value of your pension at retirement is not guaranteed and will depend on the level of contributions you make, the growth of your pension fund and the charges you pay.

With a personal pension plan, or PRSA, you have to decide how much to contribute in order to give you the income you will need when you retire. This is your 'pension target'. The older you are when you start your pension, the more you will need to save each year to reach this target.

For example, if you are 35, earning €30,000 a year and you want a retirement income of €20,000 a year, including the state pension, you would need to save about €4,200 a year before tax for the next 30 years - correct as of January 2009, see the Pensions Board calculator for more information.

If you were starting your pension fund at the age of 45, you would need to save €6,900 a year for the next 20 years. So it pays to start a pension as early as possible, if you can afford it. Remember, you can get tax relief on your contributions, so the net cost to you will be lower. Use the Pensions Board online pension calculator to help you estimate the yearly amount you need to contribute to meet your pension target at the age of 65.

Most personal pension plans and PRSAs allow you to pay regularly monthly contributions or lump sums and sometimes both. If you make regular contributions, your pension provider may automatically increase your contribution each year, at a fixed rate or in line with inflation. This is called indexation or index-linking. It allows you to build up your fund so that it keeps pace with inflation, but extra charges may apply. Make sure to find out what charges you will have to pay before agreeing to increase your contributions.

It is important to review your personal pension plan or PRSA regularly to make sure you are contributing enough to get the pension you need and to make sure your charges are in line with your pension contract. Even if your contributions are index-linked, you may still need to increase your contributions so that your overall fund is large enough to give you a reasonable pension at retirement. You can move from one plan to another or transfer from a personal pension plan to a PRSA or vice versa. When you take out a pension discuss the option of increasing your pension contributions with her pension provider.
Charges on personal pension plans and PRSAs

You have to pay certain charges to your pension provider for setting up and managing your pension plan.

These charges can have a significant effect on the value of your pension at retirement. Ongoing yearly charges, for example, are calculated as a percentage of the amount of your fund. So the amount charged will increase as your pension fund grows.

The charges you may have to pay include:

    * allocation rate - this is the percentage of your contribution that is invested in the pension fund. It typically ranges from 90% to 105% of your contributions. A 95% allocation means your pension provider invests 95% of your contribution and takes the other 5% as a charge
    * entry charges and bid/offer spreads - these typically range from 0% to 5% of your contributions. If the entry or bid/offer charge is 3%, it means you pay a charge of €3 on every €100 of your invested contribution. So the value of your investment is then €97
    * monthly policy fee - this is usually a fixed amount taken each month if your contributions are paid in monthly and typically ranges from €3 to €6 a month. It is taken either directly from your contributions or from the value of your fund.
    * yearly fund management fee - this is a set percentage of the value of your pension fund that is taken each year to pay for fund management and sales costs. It usually ranges from 0.75% to 1.5% of your fund value. So, as your pension fund grows, the amount taken from your fund to pay this charge increases.

Charges vary depending on whether you have a:

    * standard PRSA
    * non-standard PRSA
    * personal pension plan.

Standard PRSA - with a standard PRSA, the charge can't be more than 5% of each contribution and 1% per annum of the fund value. There are certain investment restrictions on standard PRSAs but the fund choice available is broad enough to meet most people's needs.

Non-standard PRSA - these offer a wider choice of funds than a standard PRSA but at a cost. These plans generally have higher charges than standard PRSAs and there is no set limit on these charges.

Personal pension plan - these also offer a wider choice of funds and can also involve higher charges than standard PRSAs.
Information your provider should give you

It's important that you read all documents that you are given because they contain important information about your personal pension plan. Keep copies of all documents for your records.

For a personal pension plan:

    * Disclosure notice/key features document - you must get this before you sign up to a personal pension plan. The document outlines the details of your plan, any charges, any commission paid to the seller and the projected retirement benefits. This is a general document and figures will not be specific to you.
    * Specific information - when you take out the plan you will be given a document outlining the specific details and figures relevant to you. This document will also give you information on your 30 day cooling off period [link to glossary].
    * Annual value statement - this applies to plans taken out after 1 February 2001. The statement will include information on the contribution you are making and the maturity or surrender value of the plan.

For a PRSA: 

    * Preliminary disclosure certificate - you must be given this before you sign the application form. This is a general document and gives projections on what you might get on retirement based on certain contributions. This document will also give details of your 30-day cooling off period.
    * Non-standard PRSA declaration - If you choose to invest in a non-standard PRSA, you will be asked to sign this document. It explains the product and the charges that apply to it. Read it carefully and only sign it if you are fully satisfied. Keep a copy for your records.
    * Statement of reasonable projection - this gives you a projection of what you might expect to get on retirement. You should be given this 7 days after you have signed up to the PRSA, each year, any time you ask for it and within 7 days of you increasing your contribution.
    * Investment report - you should get this every 6 months and it should give you information on the performance of the investment funds that your PRSA is invested in.
    * Statement of account - you should get this every 6 months. The statement should show you the total contributions made to date, the total contributions made since the last statement and the transfer value of the PRSA. The transfer value is important if you are thinking about moving to another PRSA, to a Personal Pension Plan or to a work pension.

Back to top

Annuities and ARFs

Annuities

An annuity is a contract with a life insurance company that will pay you a guaranteed, regular pension income for life in return for a capital sum. In this case, the capital sum comes from your retirement fund. You will pay income tax and government levies on the income that you receive.

The amount of regular pension income you get depends on a number of things such as:

    * the amount of money from your retirement fund that you invest
    * if you are male or female
    * the type of annuity you want
    * your age and state of health when you buy the annuity
    * the percentage of your investment that the life assurance company agrees to pay you as a regular pension. This is called the ‘annuity rate',

Before buying an annuity, you need to decide:

    * Do you want part of your pension to continue to be paid to one or more dependants after you die?
    * Do you want a pension income that will increase regularly, or one that stays level?

Your regular pension payment will be smaller if you choose an annuity that increases each year (an ‘escalating annuity'), or one that provides some payment for your dependants after you die. If you choose a level pension, you will get a bigger income now but inflation will gradually reduce its value as you get older.

Advantages of Annuities

    * You get a secure, regular income for life so you know exactly where you stand.
    * You can choose an annuity type that best suits your needs, such as one that gives a part-pension to your dependants after you die.
    * Once you invest in an annuity, you will not need any more investment advice in relation to it. You don't need to worry about investment risk as your income is guaranteed.
    * You pay lower charges than with an ARF.

Disadvantages of Annuities

    * Once you take the pension, your income level is fixed and can't be changed afterwards.
    * If you choose a level pension, or one that does not increase each year, inflation will reduce its value during your retirement.
    * If you die early and your annuity income is just for your own lifetime, the money you used to buy the annuity does not go to your dependants. Basically, your annuity dies with you.

Remember you can shop around for an annuity and you might be able to get a better annuity rate.

Approved Retirement Funds (ARFs)

An Approved Retirement Fund (ARF) is a personal retirement fund where you can keep your money invested as a lump sum after retirement. You can withdraw from it regularly to give yourself an income, on which you pay income tax and any other government levies, such as the income levy. Any money left in the fund after your death can be left to your next of kin.

Under new rules, if you do not withdraw any money from your fund, Revenue will assume that you have withdrawn 3% each year and income tax and income levy will be taken from your fund each February. So you will be charged tax whether you have taken an income or not.

An ARF invests in various assets such as shares, property, bonds and cash so the growth of your ARF fund depends on the performance of the assets it is invested in. ARFs are designed to grow in value but your original investment is not guaranteed. An ARF can run out during your lifetime if:

    * you make large, regular withdrawals from it, or
    * investment returns are less than expected.

ARFs are subject to yearly management charges, which are taken from the fund and reduce the value of any growth in the fund. An Approved Minimum Retirement Fund (AMRF) is similar to an ARF, except you cannot withdraw any of your original capital until you reach 75. Until then, you can only withdraw any growth in value the fund may deliver (less charges).

Advantages of ARFs

    * You keep control of your retirement money. This may be important if you are in poor health or want to leave this money to your dependants after you die.
    * You have flexibility in terms of when and at what rate you draw on your ARF in retirement.
    * You can choose how to invest your ARF and select the type of investments that suit your needs and attitude to risk.
    * Any growth in your ARF is tax-free.
    * You can always use your ARF to buy an annuity later on, if you decide that you need a secure, regular income. By waiting, you may be able to get a higher annuity rate later on for the same lump sum (as you get older).

Disadvantages of ARFs

    * Your retirement money is not guaranteed to keep its value because the assets in which your ARF is invested may not perform as well as expected.
    * There is a risk that the ARF could run out in your lifetime. This could happen if you take income from your ARF at too high a rate or its investment performance is less than expected.
    * You will have to pay for any ongoing investment advice about your ARF.
    * Some ARFs have high ongoing charges, which will reduce the value of your fund.
    * There is no guarantee that your ARF will be able to buy you a higher pension later on than you could have bought at retirement. Annuity rates could be lower in the future than they are today.
    * Revenue will assume that you have taken 3% from your fund each year even if you haven't and you will be charged income tax and income levy on that amount.

If you can choose between an annuity and an ARF, it is important to weigh up the pros and cons of both, and consider your own personal circumstances, now and in the future, before you make a final decision.

Back to top

Small self administered pension schemes

A Small Self Administered Pension Scheme (SSAPS) is an occupational scheme with less than 12 members. It can be used where family members work and own a business together or for groups of company directors.

The scheme is self-administered, which means that you do not buy a pension from an insurance company and you decide yourself what the pension fund will be invested in.

Under Revenue rules all SSAPS must have a Revenue approved Pensioneer Trustee. This will be a person or a company who is independent of the business and who is a professional pension trustee. This person or company will have experience in dealing with and setting up pensions. 

This person will be your pension administrator and will show you how to get started and will tell you what rules and regulations you need to follow. A list of pensioner trustees is available from Revenue on request.

The difference between this type of pension and any other pension is that instead of giving your money to an insurance company for them to invest, you keep the money and invest it yourself. There are some restrictions on how you can invest the money. A sample of some of those restrictions is below:

    * If you are investing in a property investment, the person selling or letting the property cannot be connected to the SSAPS.
    * You can't use the pension fund to purchase a holiday home and there are strict rules regarding the purchase of overseas property.
    * You cannot purchase shares in the company that you own or are a director of.
    * Personal items cannot be bought, for example, art, jewellary, vintage cars, yachts, etc.
    * Investments in private companies (not listed on the stock exchange) can only be a maximum of 5% of the pension's assets and a maximum of 10% of the private company's share capital.

You can get more information on SSAPS is available from the Revenue.  

You can use it firstly to top up your tax free retirement gratuity to the maximum level allowed by the Revenue Commissioners. You will usually be able to transfer any balance to an Approved Retirement Fund (ARF), which you can draw on in retirement, or use to buy an annuity. Any balance in your ARF on death in retirement is payable to your dependants. You should check with the Revenue if your AVCs qualify for income tax relief, within limits.
Where can you get more information on AVCs?

Ask your HR department or pension administrator or your union about AVCs. Many public service unions have specific AVC schemes for their members. Your employer may provide AVC facilities by:

    * setting up an AVC fund, either as part of the main employer's pension plan or as a separate AVC plan or
    * arranging a personal retirement savings account (PRSA) for employees who want to make AVCs

If there is no facility within your employer's pension plan for AVCs, you can set up your own independent PRSA into which you then pay the AVCs. In this case, your contributions will not be automatically deducted from your salary before tax. You will have to arrange to pay the AVCs and claim tax relief yourself. You can contact Revenue for information on how to claim tax relief. Pensions can be complex products, so you may wish to get financial advice. Your financial advisor will discuss your options with you and recommend a product based on its suitability to your needs. But ask your advisor about all your options including NSPs.

Planning for your family's future involves savings and/or investing and considering options including life insurance and protection policies.