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RETIREMENT
PLANNING

BTHLE UFFER’S

PGUIDEETNO SIONS

Starting a pension plan is one of the easiest
and wisest investment decisions you will
ever make. There is no simpler or more
tax-efficient way of saving money for your
retirement – and you’re going to need a
lot more money than you think to retire
comfortably, writes independent financial
planner Rory Brazil

pen·sion poassuttsteoinxopgnemartsosnyroeeuycoibnmetogminaenpedaernnsiinogn, So, what exactly is a pension?
It’s the money (usually income) that you will live on
noun but, if we’re honest, the reality isn’t always so when you stop working. In effect, it will replace the
1. a regular payment straightforward. Whether it’s paying off credit salary that you earned before retirement.
made during a person’s card debt or a loan, putting something aside
retirement from an each month to build up savings, or dreams of What is a pension plan?
investment fund to which getting one shaky foot on the property ladder, Pension plans are simply a very tax-efficient way of
that person or their most of us have a number of financial saving up a fund of money for when you retire.
employer has contributed commitments, so it’s not surprising that saving
during their working life. for retirement can easily be pushed further and There are three main types:
further down the list of priorities. • Personal Retirement Savings Accounts
verb (PRSAs)
1. dismiss someone But the importance of the task ahead • Personal Pensions
from employment, shouldn’t be underestimated. With a little • Company Pensions
typically because of age expert know-how along with some debunking
or ill health, and pay of pension myths and fallacies, it’s easy to arm Why do you need a pension plan?
them a pension. yourself with the basics of starting a pension The State Pension is currently only 230.30 per
“he was pensioned off and saving for your nest egg week. Furthermore, the qualifying age has risen to
from the army at the
end of the war”

4243 IRISH TATLER MAN

age 68 in 2028. This means that if you were need a pension for a longer time and it will monthly amounts, but they can be paid less
born on or after 1 January 1961, the minimum cost more to provide. So, the sooner you start frequently — say, quarterly or yearly — or even
qualifying State pension age will be 68. your pension plan, the better – as the more as one-off lump sum payments.
money you are likely to build up
In a recent Pensions Board survey, 87% of How much do you pay?
workers said that the State Pension would fall WHOOWRKASPENSION PLAN That’s up to you to decide. However, if you
well short of their needs. So, unless you’re join a pension plan arranged by your employer,
planning on surviving on bread and water Who can have a pension plan? there may be a minimum level of contribution
(which you’ll be charged for), you’ll almost You can – provided you are under age 75 (and, that you will be required to pay into the plan.
certainly need a higher pension – and it will be if you’re reading ITM, chances are you’ll fall
up to you to make up the shortfall through into this age category). And that’s regardless Before you settle on the amount, talk to
your own pension plan. of whether you are working full-time, part-time your pension adviser. This will help you
or in casual employment. determine how much you should be
Why do you need to worry about contributing to your pension plan.
pensions now? Who pays for the plan?
With improving health, most people are, It is your responsibility to pay contributions What happens to the contributions?
thankfully, living longer nowadays. This means into the plan. These are usually regular They are invested by the pension provider
that we should all have more retirement years (usually an assurance company) that operates
to enjoy. The downside, however, is we will the plan.

businessclinic

THE EARLIER YOU START PAYING
INTO YOUR PENSION PLAN, THE MORE
AFFORDABLE YOU WILL FIND IT

What happens when you retire? some straightforward budgeting to work out Ask a pension adviser to help you
The accumulated value of your plan will how much pension you are likely to need. establish whether or not you are likely to have
provide you with your retirement benefits. a shortfall – and if so, how much you should
You will be allowed to take some of the money Some of your income will go down increase your contributions to make up the
as a tax-free cash sum. The balance of the Unless you win the lottery, the one sure thing difference.
fund will then be used to provide you with a is that, when you retire, your income will fall
pension. This can be arranged by using the – as your pension is unlikely to equal your CINOVNETSRTIBINUGTITOHNES
money to buy what is called an ‘annuity’, or earnings immediately before you retire. But
investing it in an ‘approved retirement fund’. you don’t want to be left high and dry. So you To give your contributions the opportunity to
should try and work out how much income grow faster than inflation, you should
THE TAX BREAKS you will actually need. consider a plan that will put your money to
work in a balanced portfolio of stock
Because the Government wants to encourage Some of your expenses will go up market-linked investments.
everyone to set aside money for their You are likely to spend more time at home
retirement, it gives three valuable tax breaks than when you were working. So in the winter, Your pension adviser may recommend
to pension savers – whether they have their you may have to heat your home regularly – that you invest the contributions in a
own pension plans or are in a company not just in the evenings and at weekends. diversified portfolio of funds that will spread
pension plan. With more time on your hands, you may want your money across a large number of assets,
to spend more on entertainment, like the including shares, bonds, properties and cash.
The first is tax relief on what you pay in. cinema, theatre, holidays and restaurants.
The second is tax-free growth on any Isn’t stock market investment a
investment returns within the plan. And the Preparing a budget bit risky?
third is the ability to take part of your fund as As a general rule of thumb, many pension It can be – as the value of investments can
a tax-free cash lump sum at retirement. advisers recommend that people should aim fall as well as rise. However, most pension
to provide themselves with a pension of companies offer a choice of funds ranging
How does tax relief on around two-thirds of their annual earnings from low risk to high risk.
contributions work? just before retirement. However, it is best to
When you pay money into a pension plan, discuss your individual requirements with a A low risk fund aims for steady growth,
you can claim tax relief on the contributions pension adviser. with little (but still some) risk of losing your
at your marginal rate of tax. money. A higher risk fund aims for higher
Your pension adviser can work out the growth, but carries a greater risk of falling in
For example, an annual contribution of numbers with you, building in assumptions value.
1,000 would result in a net cost of 590 for about when you expect to retire and how your
a 41% taxpayer, and 800 for a 20% taxpayer. earnings are likely to increase between now You will be able to choose the fund(s) that
and retirement. you prefer. You should discuss the
Does tax-free growth make much alternatives with your pension adviser, so that
difference? YHOOUWPMAUYCIHNS?HOULD you can select a fund or funds that suit your
investment risk profile and best match your
Certainly. Your pension plan (or your Are you just starting a pension needs.
employer’s pension plan) will be invested in a plan now?
fund that doesn’t have to pay any tax on any The earlier you start paying into your pension Who invests the funds?
of its investment returns. That’s a great plan, the more affordable you will find it, as The funds are managed by investment fund
benefit – as the value of your plan should you will be spreading the cost over a greater managers, who aim to increase the value of
build up much more quickly than in a fund number of years. your plan by choosing investments that they
that has to pay tax. believe will prove profitable – although the
As a general rule of thumb, you are aiming results they achieve cannot be predicted or
Can you draw money tax-free? to provide yourself with a pension that is guaranteed.
Yes, when you retire, you will have the option two-thirds of your earnings just before you
to take part of the money in your plan as a retire. This means, of course, that the And when retirement gets closer?
tax-free, cash lump sum. younger you are when you start saving, the Investing in stocks and shares gives you the
less your pension will cost you – and the potential of enjoying long-term growth.
TNHEEEDINICNORMEETYIROEUMWEINLTL older you are at the outset, the more you However, with stock market investments you
will pay. can run the risk that the value of your plan
The main priority is to avoid falling into the can fall as you approach retirement.
‘pensions gap’, whereby you find yourself Do you have any existing pension
short of money. Beyond that, you will almost arrangements? If this is a risk that you are uncomfortable
certainly want to maintain your standard of Many people have already pension plans in with, talk to your pension adviser about a
living. place. You should check to see if the ‘lifestyle option’. This option provides the
arrangements are likely to be sufficient for facility to reduce the investment risk as you
You may have big plans, such as travelling your needs. approach retirement by switching your fund
the world, buying a foreign property, or taking in progressive stages into more secure
up a hobby that you have always dreamed investments.
about. Therefore, it makes sense to start with

4445 IRISH TATLER MAN

Frequently asked questions

CAN I VARY MY CONTRIBUTIONS? adviser at this time in order to get the advice receiving a regular pension, you can simply
most appropriate to your individual draw the money as and when you need it
Most pension plans will allow you to increase circumstances. (subject to conditions). On your death, the
or decrease your contributions at any time. balance in the fund will be paid to your
Also, you can take ‘payment holidays’, which WHAT OPTIONS DO I HAVE chosen dependant(s).
allow you to stop your contributions WHEN I RETIRE?
altogether and start them up again when it WILL MY PENSION BE
suits you to do so. You should, however, try to After you have taken your allowable tax-free SUBJECT TO TAX?
maintain your contributions so that your cash amount, the balance of the fund will
retirement fund is constantly being built up then be used to provide you with a pension. Yes. Similar to any other form of income, your
over time. This can be arranged by using the money to pension will be taxable.
buy an ‘annuity’ or investing in an ‘Approved
CAN I ALTER MY INVESTMENT Retirement Fund’. WHAT ABOUT CHARGES?
CHOICE?
WHAT IS AN ANNUITY? The pension provider will charge for setting
Yes. Most pension plans offer you a wide up and running your plan. Usually charges will
range of funds to choose from. As time goes It is a guaranteed income for life. You can automatically be deducted from your plan.
by, you can switch all or part of your choose either a level pension or an indexing
accumulated fund from one investment fund pension. You can also choose what will Before setting up a pension plan, ensure
to another. happen to your pension when you die. For the charges are competitive and clear to you.
example, it can stop straight away, or it can And if in doubt, talk to your pension adviser.
You should review your fund options on a continue to be paid at a reduced rate to your
regular basis with your pension adviser. spouse/partner. HOW CAN I FOLLOW THE PROGRESS
OF MY PLAN?
WHAT HAPPENS IF I CAN’T AFFORD WHAT IS AN APPROVED
TO MAKE A MONTHLY PAYMENT TO RETIREMENT FUND? You will receive an annual statement from
MY PENSION? your pension provider on the progress of your
It is a post-retirement investment fund. It still plan and the performance of the underlying
Most pension plans will allow you to take has the potential to earn investment returns, investment funds. Most providers also have
‘payment holidays’ which allows you to stop however, there are usually no guarantees. the facility to let you monitor your plan online.
your contributions for a specific period and Always take the time to review your pension
start them up again when the time is right for If you choose this option, instead of plan at least once a year.
you.
THE NEXT STEP
WHAT IF I CHANGE JOBS?
Talk to an independent financial broker
If you have your own pension plan, either set An hour with a financial broker is probably one of the most important things you can do. Look
up personally or through your employer’s at it as a financial health check.
scheme, you have a number of options when
moving jobs. You can, for example, transfer An independent financial broker will work with you to review your current pension provision,
your fund value to a Personal Retirement recommend possible solutions and ensure your pension needs now, and into the future, are
Bond or your new employer’s scheme. provided for.

There are other options available, though, For a helpful and accurate way of calculating how much you need to retire, try using Brazil
and it’s advisable to speak to your pension Financial Planning’s free pension calculator, which can be found online at
brazilfinancialplanning.ie ITM