Starting a pension in Ireland offers several benefits and is an excellent financial decision for various reasons. A pension encourages long-term financial planning and helps you take control of your retirement goals. By contributing regularly to a pension fund, you develop a habit of saving and actively preparing for your future. It provides peace of mind, knowing that you have a dedicated retirement fund in place with the ongoing guidance of a financial advisor.
In addition, it can be very useful for Inheritance Planning, as pension funds are treated favorably from an inheritance tax perspective. If you pass away before retirement, your pension fund can typically be inherited by your beneficiaries, subject to certain conditions. This can be an effective way to pass on wealth to your loved ones while minimizing tax liabilities.
Here are the top reasons to start a pension in Ireland:
1. Tax Relief on Pension Contributions
The state doesn’t want to be responsible for you when you’re going on month long cruises around the Mediterranean in retirement, therefore they allow any payments towards your pension plan to offset your income tax bill. The maximum percentage of your income you can claim relief on, depends upon your age (Click here for an illustration). And the contributions you make benefit from the THREE tax breaks:
- You can claim tax relief on contributions at your higher tax rate (20 or 40%).
- No tax on investments growth within you pension fund.
- When you want to retire you can then take 25% of your final sum tax free & up to 4% per annum thereafter to fund your income post retirement.
The closer you are to retirement age, the greater the percentage of your income you can contribute. If managed correctly you can fund, receive a retirement income and earn investment growth all tax free. This underpins the importance of receiving good advice when managing your pension!
2. Choose When To Retire!
Currently the qualifying age for the Irish state pension is 66 years old. This will inevitably increase with time due to the ageing Irish population & increases in longevity. If you do wish to retire earlier in the future you may want to consider either maximizing your employer pension contributions by topping up by way of Additional Voluntary Contributions (AVC’s) or starting your own private pension.
Starting a pension early also allows you to take advantage of the power of compound growth. The earlier you start contributing to your pension fund, the more time your money gets to benefit from tax free compounding returns.
Often people like to take a step back from work in their early sixties. By maximizing your pension contributions and sticking to the plan, this can be a possibility.
3. You need Income in Retirement
People often forget that your income is your most important asset! Pre-retirement, a decent portion of your disposable income (money left over each month after your fixed expenses) will likely be going towards the things you enjoy doing on the weekend, or a going for a quick trip across the pond every now and then. Then all of a sudden you realize you have more wrinkles than you ever remember having, you have left your employer for good, retirement has snuck up on you without having planned how and where you will receive the same level of income that has supported you throughout the many years. To plan for retirement you will need to know where your income will come from.
€248.30 per week or €12,911.60 per year is what the Irish government is giving to retirees in 2021 to do with as they please. If you were used to a much higher income & would like to still go out to your favourite fancy restaurant at the weekends (Covid Depending), you will need to have another source of retirement income. For most people, a private pension plan is the way how. Revenue limits on your pension income allows for up to 4% per year tax free to be drawn down which will help supplement your state pension.
Did someone say Retirement Plan? A good place to start planning is to look at your current monthly income (after tax) and ask yourself what ideal amount you would like to receive on a monthly basis in retirement to maintain your preferred lifestyle.
This handy Pension Calculator will show you how much you need to start saving NOW to receive your preferred income in retirement. Next, contact your Financial Advisor (right here if you don’t have one), simply discuss your current financial situation, and a solution that best suits your retirement goals and he or she will regularly check in with you to ensure that you are maintaining them.
4. We’re all living longer – Irish people especially!
Nowadays, people are leading more active lives in retirement. Living longer certainly sounds appealing as it gives us more time to accomplish our goals in life like visiting the places we’ve always wanted to and enjoying our everyday hobbies. Although positive, this also brings with it the challenge of having enough financial resources to see it through.
According to the 2019 Key Health trends published by the department of Health in Ireland, over the past decade we have added 3 months per year to our life expectancy with the overall mortality rate having reduce by 10.5% since 2009. This shoots Ireland above the EU average as living longer than our European neighbors. Life expectancy on average will now see men living to 78 and women to age 83. Long term care is an expensive business for the elderly, and so by planning now for sufficient income in retirement will ensure that you don’t have to be a financial burden on your family.
So where to from here?
The earlier you start contributing to your Pension, the better off you will be in retirement! Most people find that paying into a pension is not the highest priority. And that makes total sense given that more important financial obligations come first such as mortgage or rent bills, insurance premiums, other loans to pay off, and not to mentioned putting food on the table at the end of the day.
However, after these mandatory expenses and if you have a few quid left over each month, consider regularly putting some away into your own private pension. You will thank yourself later in life!
The best option for you depends on your personal circumstances.
If you need guidance on how prepare for the retirement YOU want, the best place to start is to seek advice from a Qualified Financial Advisor.
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