So, you are ready to retire and would like to put money away for your retirement and be ready for your future. The good news is we are living a lot longer than ever before. The latest figures suggest that women and men in Ireland can expect to live to 81.5 years on average. Living a longer life means we need to set ourselves up with income for after we retire. Setting up a pension scheme and savings plan would be the obvious answer here to provide for post-retirement. Pensions may seem complex but should not be neglected the earlier and the more you contribute the more financial security you will be before you retire. So, whether you are just starting out on a career path or may be getting close to retiring you should start planning for your future today. We recommend reaching out to Independent Trustee Pension Schemes for more information. So, here is our beginner’s guide to pension schemes.
What is a Pension?
A pension is a long-term savings plan where you put money in to save for your retirement and future. A savings plan has special tax benefits designed to build a fund for retirement. Self-employed, unemployed, employers, and employees may all set up a pension plan to start saving for their retirement. The sooner you set up a pension and the more contributions you make the more it will grow. Setting up a pension is a big financial decision but one of the most important you will ever make. On your retirement, you take the money from your savings plan when you need to, or you can also do a money exchange with an insurance company and until the day you die have a regular income, this is referred to as an annuity.
A state-pension is for those who have had a working career and have paid enough PRSI contributions. The maximum state contributory pension per week is €248.30. If you haven’t paid sufficient PRSI you will receive less. A state pension in Ireland is received from age 66 years.
This is a pension that an employer has set up for an employee and both would generally pay into it.
A self-employed worker would generally set this type of pension up themselves.
Defined contribution is where you pay a certain amount of your salary into a pension plan and the amount that is paid out is dependable on the figure you paid in and your returns on investment.
How much should you save and when should you start your pension plan
The sooner you start saving for your retirement the better. If you start too late the more money you will have to pay in to catch up.
Decide when you would like to retire from working whether late or early you must look at it as to whether you can afford it. It is important to make sure that you are financially secure for when you retire.
1. How much can you afford
You must consider your basic living expenses and your bills. You should look at what income you have left and then speak to a financial advisor about how much you can afford to pay into a pension scheme. You can always increase or reduce the amount at any stage depending on the circumstances.
Know the benefits and the rules
There are some limits to how much you can pay into a pension plan every year, but they are very generous. There are rules of when and how much you can take out of your pension scheme. The main idea of a pension plan is to use the money when you retire so you wouldn’t be allowed to use the money beforehand.
The government offers a tax relief for those companies and workers who take out a pension. This will then make your pension fund a lot more efficient for building money for your retirement.
The government allows you to pay a sizeable amount of your income into a pension and claim tax relief at the high rate of pay. The older you get, the more you can invest each year will increase.
Investments growth is tax-free
Any investment growth will be tax free. You do not have to pay capital gains or income tax on it.
A tax-free lump sum on retirement
The best part of retiring is being able to receive a portion of your pension as a tax-free lump sum.
Investing in a pension scheme is an investment but also there are some risks. The main risks would be:
1. The funds will fall in value
2. The pension fund will not perform good enough to keep pace with the growth in the cost of providing the pension
3. The pension funds return will not keep pace with inflation