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Pensions

Unless you are happy to see your standard of living reduce sharply in retirement, you will need to ensure; you, your employer, or both, are funding for your retirement. The state pension provides for basic living expenses and is not intended to provide for a replacement income in retirement.

Many people who are now in employment have seen their earnings increase significantly during the Celtic Tiger years and beyond. People’s living standards have risen to meet these enhanced levels of earnings. If these living standards are to be continued and enjoyed in retirement, an adequately funded pension will need to be in place.

The additional factor, while good news for most, is that we are living longer. Life expectancy rates for people aged 65 have increased by approximately 2 years between 1990 and 2001. So, in 1990 the average male aged 65 could expect to live another 13.4 years (to age 78.4), in 2002 that had risen to 15.4 years (80.4). If this life expectancy rate continues, it will lengthen the retirement period which will require a replacement pension income.

See average life expectancy rates and average retirement periods, in our retirement funding years tool.

Probably, the Best Investment Structure in the World?

Despite being the best investment vehicle and tax management structure, there still appears to be reluctance by the majority of people in Ireland to face their pension deficit. Many investors are travelling the four corners of the planet to try find the next property hot spot, while the best investment they will ever come across is staring them in the face, their pension.

If you are on the top rate of income tax - What other investment returns 41% after year 1? It can be argued that some of this immediate tax benefit will be clawed back in future years when we draw down on our pension fund, but the tax relief is available now, who knows what the rate of tax will be in 10/20/30 years time.

To add even more injury to those investors, most could invest in property assets within their pension and ensure that; they get tax relief on their pension contribution at their marginal rate, gain relief from income tax on rental income on the pension property assets and ensure that the capital gains on the assets remain tax free within their pension. To top if off, they would also be able to withdraw a tax free lump sum from their matured pension plan at retirement.

Start Early

The key to financial security in retirement is to have a properly funded and managed pension. Many people have reached middle age without having any pension provision in place. The sooner an individual starts a pension, the better. Starting early is one of the most important aspects of pension planning.

For example; to target a retirement income of €10,000 per year at age 65 (in today’s money), a person who just started their pension would need to contribute €302 a month at age 20, €431 per month at age 30, €669 a month at age 40 and €1,152 a month at age 50. Clearly people who start younger can spread the funding of their pension over a longer working period.

The government does recognise that some people may start their pension later in life. So the closer you get to retirement, the greater the amounts you can contribute and gain valuable tax relief.