How to Plan Your Pension: A Comprehensive Guide by Greenway Advisors

Planning your pension is crucial to ensuring financial stability in your later years, and this applies everywhere, including in Ireland.

As life expectancy continues to increase you need to plan and make sure your finances will be secure in retirement.

While the pension age is set to increase over the next number of years you still need to make sure you have planned how to financially support yourself.

Remember, planning your pension is a long-term process, and the earlier you start, the better prepared you’ll be. Here is our guide on how to plan your pension

• Step 1: Determine Your Retirement Goals
• Step 2: Understand Your Current Pension Plan
• Step 3: Contribute Regularly
• Step 4: Invest Wisely
• Step 5: Keep Track of Your Plan
• Step 6: When you reach retirement
• Step 7: Consider Professional Advice

Pension Plan Step 1: Determine Your Retirement Goals

Envision Your Retirement Lifestyle: What do you want your day-to-day life to look like during retirement?

Do you want to travel, spend time with family, take up new hobbies, or engage in community service?

Your activities and lifestyle in retirement will largely determine how much income you’ll need to support yourself.

Consider Housing: Do you plan to stay in your current home, downsize, or move to a different location?

Your housing situation will not only affect your cost of living but also your lifestyle, especially if you plan to relocate to a different community or even a different country.

Identify Your Income Sources: In addition to a private pension and state pension, what other income sources will you have during retirement?

This might include savings, investments, rental income, or part-time work.

Plan for Unexpected Costs: Life is unpredictable, and unexpected costs can arise. Having a contingency plan can give you peace of mind and prevent these situations from derailing your retirement.

Consider Legacy Goals: If you plan on leaving inheritances to your children, grandchildren, or charity it is important you factor this into your retirement planning. Remember in Ireland the beneficiary is responsible for any tax liability on inheritances.

Pension Plan Step 2: Understand Your Current Pensions

Familiarise yourself with the different types of pension plans available to you. Some common pension schemes are:

• PRSAs – Personal Retirement Savings Accounts.
• PRBs – Personal Retirement Bonds.
• Defined Contribution.
• Defined Benefit.

If you are in a company pension scheme, have a self-employed pension or executive pension you need to make sure you understand the rules around your pension plan.

Maximise your tax reliefs as much as your can. Remember €100 added to your pension could cost you only €60. Read more about how pension tax reliefs work here.

Important terms and numbers to know when planning your pension.

Units
Every time you make a contribution to your pension this is used to buy units in your chosen funds. A unit is your portion of ownership in the fund.

Allocation Rate
The percentage amount of your contribution that is used to buy units.

Management Charges
The percentage amount taken from your fund every year by the pension company for the cost of running the pension. If you choose to pay for advice from a broker using commission, instead of an upfront fee, this is also included here.

Risk Levels
Pension funds are spread across 7 risk levels. Risk Level 1 is very safe with low potential growth. Risk Level 7 is very adventurous with high potential growth.

Some pension providers have slightly different ways of measuring risk. For example, a level 5 fund from one company could have a higher level of risk than a level 5 fund. It depends on the assets that the fund is invested in.

Be aware when comparing funds from different providers with the same risk level.

Enhanced Transfer Value
Enhanced Transfer Values in Ireland are offered to former employees as a one-off opportunity for their pension transfer values.

Read more about Enhanced Transfers Values here

Many people have multiple pension plans from different employments in different countries. It is worth exploring if multiple pensions can be combined together.

It makes it easier to manage your pension and you’ll save on fees and increase the impact of compound interest on your pension fund.

Your pension advisor can explain everything you need to know about planning new pensions or managing existing pensions. Making sure you have created a realistic and achievable pension plan. 

Pension Plan Step 3: Contribute Regularly

Compound Interest: One of the most powerful aspects of saving for retirement is the ability to earn interest on your interest, or compound interest.

With unit-linked pension investments, you can receive a return on your investment. Due to compounding, like above, the following year you earn a return on your original contributions and last year’s return.

The more regularly you contribute, the more money you’ll have to capitalise on investment returns, which can significantly increase your total savings over time. €200 contributed monthly over a 20-year period costs you €65,660. With 3% growth, you can gain an extra €17,660 in investment growth.

Budgeting: Regular contributions can help with budgeting, as they turn saving for retirement into a regular expense. This can make it easier to manage your money and ensure that you prioritize saving for retirement.

Euro-Cost Averaging: By making regular contributions, you can take advantage of euro-cost averaging. This strategy involves regularly buying a fixed euro amount of an investment, which can reduce the impact of short-term market fluctuations on your overall investment.

Additional voluntary contributions (AVCs): If you have a little extra money and you haven’t used all your pension income tax reliefs in a calendar year, you can make AVCs to your pension fund. They are treated the same as normal pension contributions for tax purposes. Read more about AVCs here.

Pension Plan Step 4: Invest Wisely

Diversify Your Investment funds: Spreading your investments across a variety of asset classes (like stocks, bonds, property, and cash) can help reduce risk. As you get closer to retirement it is especially important to begin bringing down the risk level of your funds to reduce volatility. Many pension products have an option called “Lifestyling” that will automatically make this adjustment.

Understand Risk and Reward: Higher potential returns often come with higher risk. Understand your risk tolerance – your ability and willingness to withstand drops in the value of your investments. This includes your financial ability to take a loss, as well as whether you find higher risk investments stressful.

Consider the Costs: All investments come with costs, and these can eat into your returns. Be aware of any fees associated with your investments and try to keep them as low as possible. Ask for the fee structure to be explained in detail.

Stay Informed: Keep up-to-date with financial news and understand how it might affect your investments. However, be wary of making investment decisions based solely on headlines. Ask questions.

Think Long-Term: Investing is usually most successful over the long term. Try to avoid the temptation to react to short-term market fluctuations.

Pension Planning Step 5: Keep Track of Your Plan

Every pension provider in the Irish market provides a website portal for you to view your pension account, and in some cases make changes.

This allows you to change funds (watch out for charges on fund switching). Manage your regular contributions and annual voluntary contributions.

Every year your pension provider will send you a statement on your pension account, but it’s important for pension planning that you check your account performance a number of times a year and make adjustments as needed.

If you are not sure what to do your pension advisor is always there to offer advice and assist you in making changes.

Pension Plan Step 6: When you approach retirement

When you are approaching retirement you need to do a number of things.

1. Apply for your state pension (at least 6 months before you are due to receive your first payment).

2. You will need to move your pension fund into a post-retirement product.

We always say you plan your pension twice. The first time is when you are building your fund through your working life.

The second time is when you retire and start using your pension fund as a form of income. Normally you will have 3 options.

1. Take 25% of your pension fund tax-free. Lots of people use this for clearing the last of the mortgage, buying a new car, having a holiday or a lifetime or getting work done to your house.)

2. Put the remainder of your fund into an approved retirement fund (ARF).

3. Or purchase an annuity.

All options have pros and cons and it is important to have fully explored each option to see what will suit your lifestyle best.

7. Consider Professional Advice

The last part of planning your pension is to talk to professionals. Pension planning can be confusing and lengthy.

A good pension advisor should be able to clearly explain the pros and cons of each decision based on your individual financial goals and life circumstances.

Through the lifetime of building your fund before retirement, and when you’re relying on your pension post-retirement, your pension advisor is always available to offer advice and help you reach your pension goals.