beginners’ guide to pensions in ireland
Never the sexiest of topics, let’s be honest, but an important one nevertheless. We could spend up to a third of our lives in retirement so it’s important to plan for it accordingly, even if it always seems like something that can be put off until another day. This page is designed to provide you with a Beginners Guide to Pensions in Ireland. Some of the questions we are frequently asked are ...
The earlier you start a pension the better. Quite simply, the more you put into your pension the better so it stands to reason that the earlier you start the more you will put into your pension. If you are offered a pension at work grab it with both hands. It may seem like a long way off but your older self will thank your younger self for making one of the smartest financial decisions you'll ever make.
As a rule of thumb you should aim to contribute half of your age expressed as a percentage. For example, if you are 30 years old then 15% or if you are 35 years old then roughly 18%. To get a more accurate figure use our pension calculator.
If you are paying into a PRSA or a Personal Pension you may draw both the State Pension and your personal benefits and you can continue work. The situation may be a little more complicated if you are employed or you a a company director but , with careful planning you can tailor your retirement to suit yourself. If you want to continue working, maybe on a part-time or consultancy basis then this is possible in most cases. Although in some cases revenue approval may be required. On the other hand, some occupations such as professional sports people may be able to draw their benefits from age 50. This is also the case with Personal Retirement Bonds, PRSA's and Company Pensions that allow early retirement.
What is a pension?
A pension is simply a long-term savings plan, the goal of which is to build up a big lump sum of money that you can live off when you retire. Pension plans can go by many different names and all the jargon around them can be quite off-putting for people. But the goal of every pension is the same - to help you provide for your later years. It's all about choice - a pension lets you choose what kind of lifestyle you want to enjoy when you decide to retire or simply take things a little easier.
Why should I save into a pension?
So that you can live comfortably in retirement - something which the State pension alone won’t allow you to do. Most experts recommend that you need a pension of at least half your pre-retirement income in order to live comfortably in your golden years.
The average full-time wage in Ireland is now around €48,000 - this means you'd need an income of at least €24,000 in retirement. The current State pension is just under €13,000 a year, which means most workers can expect to experience a significant drop in their living standards unless they make their own provisions for their retirement years.
Plus there's no guarantee that the State pension will even be around in a few decades' time as it becomes increasingly unaffordable due to an ageing population. Central Statistics Office statistician James Hegarty recently warned the government-appointed Pensions Commission about this ticking pensions time bomb when he outlined how there are currently five working-age people to every one person over the age of 65. However, by the year 2051, this will fall to just 2.3 people for every one person over 65. In short, people need to start making their own plans for retirement.
The good news is that saving into a pension is one of the most tax-efficient things you can do with your money.
Why choose a pension over a normal savings plan?
To encourage people to save for their retirement, the Government has made pensions a really tax-efficient way to save in three key ways.
1. Tax-free growth
Your pension savings are able to grow tax-free. This means you are able to avail of compound annual growth or “growth on top of growth”. With a normal savings plan, you’ll be charged DIRT (currently 33%) once a year on any gains you make. With a life insurance plan (a popular type of savings policy sold by life insurance companies that invests in things like stocks and bonds,) you’ll be charged exit tax (currently 41%) every eight years.
But with a pension your savings can continue to grow tax-free for decades.
2. Tax relief on contributions
What if I told you there was a simple way to pay less tax on your income. You’d be interested, right?
Well that’s exactly what a pension allows you to do. It allows you to earn more money free of income tax - as long as you put that same money into a pension.
This means if your top rate of tax is 20% a €200 pension contribution each month will only cost you €160 after tax. If your top rate of tax is 40%, a €200 contribution will only cost you €120 after tax. Try our Tax Relief Calculator to find out how much tax relief you can get.
3. Tax-free lump sum
When you want to access your pension savings, 25% of it can be taken as a tax-free lump sum up to certain limits (the rest you can then use to buy an annuity or more simply a pension for the rest of your life).
Pension tax-free limits
There are limits to how much of your salary that you can save into a pension tax free, based upon your age.
Under 30 - 15%
30-39 - 20%
40-49 - 25%
50-54 - 30%
55-59 - 35%
Over 60 - 40%
For example, if you're 40 and earning €40,000, you can get tax relief on pension contributions up to €10,000 a year.
What's more, only earnings up to €115,00 are taken into account.
A PRSA is a flexible, portable, cost-efficient and easy to manage pension. A PRSA is available to anyone, regardless of employment status. It’s a portable pension that you can take with you if you change jobs. It’s flexible because you and your employer, if any, can make contributions into a PRSA and you can increase or decrease those contributions, or even take a payment holiday at any time.
There are two types of PRSAs; Standard and Non-standard. There are two main differences between these.
The charges relating to a Standard PRSA are capped by legislation and the choice of investment funds is wider for Non-standard PRSAs.
The benefits of a PRSA:
- Tax relief on your contributions.
- Any investment growth is tax free.
- Flexibility - it’s portable and you can stop and restart making contributions at any time without penalty.
Additional Voluntary Contributions (AVCs)
If you are already a member of a company Group Pension Scheme, then you may be in a position to improve the benefits you receive on retirement by making extra payments, known as AVCs, through a PRSA. To find out more, give us a call.
When should you start a PRSA?
It helps to start early. The sooner you start making pension contributions, the bigger your retirement fund should be when you finally retire. You can start a PRSA at any time once you are over 18. The older you are when you start, the bigger the contribution you will have to make to build up a healthy pension.
The State Pension (Contributory) is currently worth about €1,000 a month (Citizens Information Board, November 2021). It’s helpful but it’s not going to give you a comfortable life on its own. The State Pension is funded by taxes paid by Ireland’s workforce. But Ireland’s population is ageing, so in the future there will be more retirees sharing a smaller pot.
In short, you should not rely on the State to provide your pension. The only way to ensure the retirement you want is to take ownership of it now.
How much should you save?
This is, perhaps, the single most important consideration. It’s up to you but it usually depends on these main factors - when you would like to retire, what lifestyle you would like in retirement and how much can you afford to save. Of course, this may vary for lots of reasons throughout your working life.
A simple way to check how much you should save is to use our Pension Calculator.
Bigger employers, but many smaller ones too, will often have their own pension scheme (called a group pension scheme) which you will usually be invited to join upon starting your job.
If your employer doesn’t have its own group pension scheme or you’re not allowed to join it, then they must provide you with access to at least one standard Personal Retirement Savings Accounts (PRSA) into which you can save for your retirement.
If you sign up to a pension scheme through your employer they will deduct your contributions each month directly from your salary and the tax relief explained above will apply automatically. In many cases your employer will also contribute towards your pension for you too - but usually only if you contribute something as well.
Most employers offer around 5%, sometimes more. This means if you earn €40,000 a year they’ll put in €2,000 a year for you, which is nothing to be sniffed at. And you won’t pay any tax on this money either. This mix of tax-free growth, tax relief on your pension contributions, and contributions from your employer make a pension by far the best way to save for your retirement.
What pension should I join?
Your options will depend on your work situation.
If you are an employee you may be able to join a pension scheme run by your employer as outlined above.
Employees in the public sector can join their public sector pension scheme.
The self-employed can take out a personal pension. Meanwhile PRSAs are open to virtually anyone to save for retirement.
If you’re currently in a job and aren’t contributing towards a pension, ask your employer about saving for a pension today. .
When should I start a pension?
The earlier you can start paying into a pension the better, even if it only means you can save a small amount each month.
That’s because the longer you leave it, the more expensive it gets.
As a pension is for your retirement years, in most cases you cannot access the money in your pension until a certain age. Depending on the type of pension plan you are saving into, this age can be anywhere from 50 to 66 usually. So don’t put money into a pension if you think you’ll need it a few years later for a rainy day.
As it stands the qualifying age for the State pension is 66. It was due to rise to 67 in 2021 and then 68 in 2028, however the proposed qualifying age increase has been postponed for now due to political wrangling. It is however, inevitable that a future Government will have to swallow a bitter pill and accept that an increase in the qualifying age is unavoidable.
However if you are currently under the age of 50 it may be be prudent to assume that the qualifying age will be at least 68 by the time you reach retirement, if not higher.
Where does my money go?
When you save into a pension your money usually gets invested into a mix of stocks, bonds and property. Some pension funds will also invest in commodities such as coal, oil and gold.
This is because these investments provide the potential for far higher returns than simply keeping your money on deposit. If saving for a pension through your employer, they should be able to provide you with advice on all the funds available to you. There is often what's called a ‘default investment fund’.
This is the fund that’s recommended by the pension provider and its investment mix will change every few years as you get closer to retirement. However you don’t have to choose this fund and will usually have flexibility about where your money is invested.
You can also spread your money - so if you want 25% of your savings each month to go into the default investment fund, and the remainder to go into a fund that invests solely in property, for example, you can choose this.
As always, make sure you get good financial advice about where you invest your money.
Pension fees and charges
Your pension provider will charge a fee for managing your money. Fees and charges can have a huge impact on the value of your pension fund over a long period of time so it’s important you pay close attention to these.
The charges can vary but are usually one or a mix of the following:
A fund management charge (FMC) or annual management charge (AMC): 0.5% to 1.5% on average, which is levied on the value of your savings each year. Different funds can have different charges.
Allocation Rates: The higher the allocation rate the better and some of the better pension plans may even provide 100% allocation.
Policy fee: a fixed amount per month: usually €5 or so to cover administrative charges.
Some funds can charge higher AMCs of well above 1% with the promise or lure of higher potential returns. However research has shown that over several decades, most funds end up tracking the wider market anyway and that the biggest bearing on the value of your pension fund upon retirement will be fees and charges (and how much you’ve saved too of course).
Leaving a job
When leaving a job you’ll have various options as to what to do with the pension you have saved with your employer.
However a key point to remember is that if you have been saving into a group scheme for less than two years, your employer will usually refund you the money you have saved minus any money they may have also contributed. In other words they’ll kick you out of the scheme and it’ll be as if you were never saving in the first place.
This is an important thing to consider if you are thinking of leaving your job after less than two years or so.