Pension Guide 2009

Background

Pensions are primarily a tool to reduce tax liability. The Government offers very generous tax relief on company and individual pension contributions to encourage the working population to provide for their retirement. The Irish population are getting older. In the next 20 years this will result in a significant increase in the number of people retiring and drawing state pension benefits, along with any additional individual pension funds available. This increase in the retired population will not necessarily be matched by an increase in the young working population, and this will result in a funding shortfall.

The current state pension is €223.30 per week, or €11,611.60 per year (as of Jan 2008). 87% of a Pensions Board Consumer Research survey said that the State Social Welfare pension would not meet their needs in retirement. Therefore, most individuals will need additional income to fund life after retirment. This additional income can come from a number of sources, including, Income from employment after retirement, rents from investment properties and of course, Pensions.

Pensions and Tax Relief

Any individual with a taxable income can benefit from pension contributions, particularly those on the higher rate (41%). All contributions are subject to tax relief at the top rate which effectively means that 41% of all personal contributions are refunded by way of a tax rebate or relief. There are aged based limits on contributions from salary, as follows:

The aged based percentage limits for relief are:

 It is worth noting that these limits are for individual contributions only and do not include any employer contributions. This can be very beneficial to those who have control over their company cash flow, (eg Company Directors etc) as they can defer salary and make significant empoyer pension contributions instead.

The Revenue Commissioners have set these limits as they are a reliable guide as to how much one should contribute in order to have a pension of approximately 66% of salary at retirement. This is only a very rough guide as final pension fund size is dependant on a number of factors including length of time contributing to the scheme, investment growth and charges.

Pensions and Investments

There are a number of different pensions structures available, and finding the most suitable one will depend on an individuals employment circumstances, their age and also their investment requirements. Pension structures can be broken down into the following categories:

1) Personal Pensions (for Self Employed )
2) Group Scheme Pensions ( For employees in medium and large organisations ),
3) Executive Pensions ( For Company Directors )
4) PRSA’s.
5) Small Self Administered Pensions, SSAP ( For those who want more direct investment control)

The investment options available are wide and varied. The most flexible pension structure in the SSAP where the investment decisions are taken by the individual and the products chosen are not linked to any one pension provider. This structure is more suited to those with a large fund, or large contributions as charges can be high, and management of the investments can be time consuming. The vast majority of pensions are either Personal or Executive schemes. These are provided by all the major life assurance companies who all offer a range of property, equity, bond and cash funds. Choosing the right life company is a difficult process and independent financial advice should always be sought.

Pensions and Retirement

Recent changes in pension legislation have given the retiree more choice in how they wish to draw down their pension benefits. Below is a very brief summary of the options available, however, it is important that anyone wishing to draw down their pension benefits gets independent financial advice so as to ensure they make the right choices from tax, inheritance and lifestyle standpoints.

Option 1 – Annuity

• 25% Tax Free    (25% of the final pension fund total)
• The Remainder used to buy an annuity. This is a regular monthly payment for life from the life assurance company. Current Annuity Rates are approximately 4%, depending on age and Health.

Option 2 – Taxable Lump Sums  (not available in all cases)

• 25% Tax Free  ( 25% of the final pension fund total)
• €63,500 invested in an approved minimum retirement fund AMRF)
  Or €12,700 per annum of guaranteed income for life already in place
• Remaining fund drawn down less tax.

Option 3 – Approved Retirement Fund  (not available in all cases)

• 25% Tax Free (25% of the final pension fund total)
• €63,500 invested in an approved minimum retirement fund AMRF)
  Or €12,700 per annum of guaranteed income for life already in place
• Remaining Fund invested in an Approved Retirement Fund (ARF)

Conclusion

This is a very basic summary of Pension benefits and structures. It is important that any individual seeks ongoing advice in relation to the establishment, management and maturity of their pension scheme. In the end a well managed pension should provide enough income at retirement to meet the individuals family, lifestyle and financial needs, and this should be borne in mind at all stages of the pension cycle.

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