Pensions a fund that you contribute to over your working life. Your contributions are invested in one or more funds, by the fund managers of the scheme.
Investment companies and life insurance companies are the main providers of pension plans in Ireland.
Types of Pensions Include:
- PRSAs (Personal Retirement Savings Accounts)
- RACs (Retirement Annuity Contracts, also called Personal Pensions)
- Employer Pension Schemes
- Small Self-Administered Pension Schemes
Other terms you’ll hear in relation to Pensions are:
- AVC (An Additional Voluntary Contribution you can make in addition to an existing pension).
- Annuities (A contract with a life insurance company to pay you a guaranteed, regular retirement income for life, in return for a capital sum)
- ARF (An Approved Retirement Fund, which you invest in after retirement, using funds from your pension scheme. This is an investment fund, and you receive income each year by making a drawdown from your fund each year, usually of 4% to 5%. As with all investment funds, there is a risk that the value may fall as well as rise)
- Annuities and ARFs are not the Pension that you pay into during your working life. They are two options for how you can use your Pension Fund, after you retire.
What is a Pension?
Pension funds are investment products, which means that the value of your fund can fall as well as rise.
Pensions Vs Savings
A pension fund is a superior plan for retirement compared to savings for a number of reasons:
Interest rates are currently very low. This means any funds held on deposit are unlikely to substantially increase in value.
By comparison, Pension funds are designed to be kept for 20 years or longer. For many funds, you will have no access until your normal retirement age, between age 65-67.
This should give your fund enough time to recover growth if it falls in value. The longer you keep your contributions invested, the more likely your fund will grow in value.
How do i begin?
Usually working with an advisor, you will complete a questionnaire that determines your attitude to risk. This can help you to decide the type of fund to choose.
Your pension provider will have different funds to choose from, that are categorised based on their risk level. A higher risk fund has the potential for higher returns, but also greater losses, and vice versa for lower risk funds.
Your Pension Portfolio will also often have a Management Strategy, where the risk profile of the fund is gradually reduced as you approach your retirement age. The object is to take less risks with your pension fund as you’re going to need it soon.
How does a Pension work?
Pension funds are used when you retire to provide a source of income in retirement, in addition to the State Pension. The average full-time wage in Ireland is €37,646 p/a, according to the CSO.
The State Pension is roughly €12,911.60 p/a. This is a dramatic shortfall for most people, even if their mortgage has been cleared, and they no longer have housing costs.
Your employer may have their own scheme that you join, where they aim for a fund that replaces a certain percentage of your final salary, or an average of your service.
Otherwise, if you’re arranging your own pension provision, you can aim to either replace a certain percentage of your salary, e.g. 60%, or aim to build a fund that is a multiple of your salary, e.g. 12 times your salary.
What's the Benefit To me now?
While you’re building your pension fund, you can also benefit from Tax Reliefs on these contributions.
Over your working life, you’re entitled to claim tax relief on your contributions as a % of your salary. This % depends on your age, getting higher as you get older.
For example, making a contribution of €100 could cost you €80 or €60, depending on your rate of income tax.
If you’re 40, and earn €55,000 p/a, you could make a contribution of €1,145 per month, at a cost to you of €687.50 per month.
You can see your Tax Relief Limits Here, at the Pensions Authority website.
Greenway can advise and arrange the following products:
- Irish Life Pensions
- Zurich Pensions
- New Ireland Pensions
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