WHO WILL LOOK AFTER YOU IN YOUR RETIREMENT?
We will outline the benefits available to you and identify what you must do to ensure you have a sufficient pension at retirement.
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:
Our experience and knowledge means we can recommend the retirement plan that best suits your needs.
Pension options through your employer:
· Employer pension plans
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
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
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)
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.
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;
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
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.
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 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.
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.
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
Charges vary depending on whether you have a:
* standard PRSA
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.
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.
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.
Annuities and ARFs
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
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?
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.
Disadvantages of Annuities
* Once you take the pension, your income level is fixed and can't be changed afterwards.
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
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.
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.
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.
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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.
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