Maeve Corr, who heads up our personal financial advisory services team, debunks some of the myths and legends out there about making contributions to your personal pension.
1. All pensions are the same
The pension world is full of acronyms PRSA/AVC/ARF/RAC/BOB… While in essence they are all pension pots, not all have the same features or enable you to draw them down at the same time in the same way.
Review your pensions and aim to understand the following: How do I maximise my fund? When and how do I access it? What happens if I die before I access my fund? What happens to my fund in retirement?
2. There’s no point in joining my company scheme
Every year we see employees forgoing a potential contribution from their employer as they opt out of the pension fund. If your employer offered you a 5% pay increase would you leave it on the table? Often an employer will contribute an amount to an employee’s pension. Employer contributions do not attract PRSI, Employment Tax or USC, so, as an example, a €1k employer contributions is equivalent to €1,520 income if you are paying top rate tax.
In general, you can usually bring your pension to a new employment, or if you are leaving employment transfer it from your employer’s scheme, once you meet certain conditions.
Age and the fear of putting funds away from too long its often another driver, the best advice is start funding early, start the savings habit and spread the cost of retirement over your working career.
3. I will get the state pension anyway
This is not automatically true, as being eligible for the maximum contributory state pension depends on a number of factors. While there have been changes to benefit individuals who for example have taken time to care for the family and who have had break in services, it is worth contacting the Department of Employment Affairs and Social Protection to check your eligibility. You many need to elect to make PRSI contributions in order to optimise your future benefits. Check out mywelfare.ie website.
Remember if you were born after 1960, you won’t get a state pension until age 68!
4. The markets are too volatile, it’s not worth putting money into pensions
Pensions remain one of the only tax reliefs at the marginal rate, i.e. if you are paying top rate tax, and make a contribution before the tax filing date of 14th November (for those filing online), you will be entitled to a refund of tax at the rate of 40%. For example, you contribute €10,000 into a pension for last year, you get a tax refund of €4,000! This in effect costs you €6,000!
Pensions do not have to be invested in the market but if you are taking a long-term view, which you should have with pensions, these funds may be invested for 50+ years. The average stock market returns over that last 50 years was 10% pa. The average deposit return is close to zero at the moment. At contribution of €10,000 pa over 10 years could build a fund of €185,000. The net cost to you after tax relief is €60,000.
5. My pension is going to be taxed when I retire
When you retire you will be entitled to take a certain element of your fund tax free, this can be up to €200,000 depending on your pot, years of service, etc. The balance of the funds can be used to give you an income for life or put in a fund (ARF) that can be drawn in retirement. Indeed, in some cases you may be able to take the entire pot tax free!
6. If I die my pension is gone
This is a tricky area as depending on the type of pension you have the death benefits are different. On retirement you have an option for an income paid until death, often with a provision for your spouse or dependents or to transfer you pension to an Approved Retirement Fund, a pot you draw down in retirement. The latter can be passed to your spouse or family on death.
If you die before you take your benefits the treatment is different. Firstly establish what type of pension fund you have and then understand what happens when you die. In company schemes up to 4 times salary is paid out be way of a lump sum, this is normally paid to the surviving spouse tax free.
7. I can’t touch my pensions until I am 65
Some pensions will give you access from the age of 50. It’s important to understand each pension contract, how and when you can access them. In a world where we see greater mobility in employment, you may accrue pensions here and overseas. Indeed, it’s not uncommon for us to see clients with self-employed earnings and pensions from periods where they were members of a state scheme or company scheme. Get a road map of when you have access to your funds and how to leverage this against your needs is important. You may be able to stagger the dates you access your funds.
8. I won’t be around to enjoy my pension
It is important to focus on growing your pension for as long as possible as we are all living longer. When the pension age was set at 60 or 65 the anticipation was that you would not live much beyond that. Life expectancy has increased, to late 70’s for men and early 80’s for women. That’s a long time with no income.
9. Women don’t need pensions
There is still a significant gender gap in pensions. The gap in income between women and men is 35%. Now is the time to utilise the tax reliefs available and fund your pension. Don’t rely on the state pension.
10. It’s too late to start
It’s never too late to start a pension. If you are over 60 years, you can contribute up to 40% of your earned income, (up to a maximum of €115,000 of income) to a private pension and get tax relief at 40%. If you are in a company and have a planned retirement date of 60, for example at age 55 a contribution of c. 400% of salary can be made to a company scheme.