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Monday 5 December 2016

Make the right choice on retirement options

Follow advice on pension plans and how best to invest for your retirement

Aidan O'Boyle

Published 19/07/2011 | 05:00

An individual should look forward to retirement. However, many people spend it worrying about how to make ends meet. If you wish to maintain the same standard of living in retirement as you do during your working life and not experience a dramatic drop in income, you need to start saving for your retirement now. A good pension can offer financial security during this time of your life.

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Saving for retirement also makes sense as it is one of the most tax-efficient ways to save money. At present, the main tax benefits are:

•Tax relief on your contributions: The maximum level of tax relief for pension contributions to a Revenue-approved scheme is based on a percentage of your income (see table 1, below), which increases as you get older, as follows:

•Tax-free investment growth: You won't have to pay tax on any growth in the value of your pension fund. However, any income earned within the fund will generally be subject to income tax on drawdown of the funds.

•Tax-free lump sum when you retire: When you retire you can take part of your pension fund as a tax-free lump sum, up to a maximum of €200,000. The amount you can take depends on the type of pension plan which you have.

State Pension

The State pension will provide you with a basic level of retirement income. The State pension provides either:

•State Pension (contributory) for those who satisfy certain contribution conditions; or

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•State Pension (non-contributory), which is provided subject to a means test, for those who do not qualify for the contributory pension.

At present, the maximum contributory pension is €230.30 a week. There are increases available, subject to certain conditions, for persons with a qualified adult dependent or child dependent, and for those who live alone.

The recently published National Pensions Framework sets out a series of changes to the State Pension, as follows:

•From 1 January 2014, the minimum qualifying State pension age will be 66.

•From 1 January 2021, the minimum qualifying State pension age will be 67.

•From 1 January 2028, the minimum qualifying State pension age will be 68.

When planning for retirement, you will need to decide whether the State pension is enough to live on. If it is not sufficient, the shortfall between the level of the State pension and your desired level of income will need to be made up by other means. It is important that you take control of your retirement planning and make decisions regarding your pension provision as early as possible.

The shortfall between the State pension and the level of income required at retirement tends to be bridged through one or more of the following types of pensions, depending on employment status:

•Employer-sponsored pension scheme;

•Personal Retirement Savings Account (PRSA);

•Personal pension plan: Retirement Annuity Contract (RAC).

Employer-sponsored Pension Scheme

Employer-sponsored pensions are organised by employers to provide pensions to one or more employees on retirement. Employer-sponsored pension schemes may be contributory or non-contributory. In contributory schemes, both you and your employer pay contributions towards the scheme.

Contributions to such a scheme can either be a regular, fixed amount or a percentage of earnings. Benefits are decided by reference to the value of the pension fund at retirement. As a result, you do not know in advance the level of pension you will get at retirement. There is no legal obligation on employers to provide employer-sponsored pension schemes for employees.

Personal Retirement Savings Account (PRSA)

PRSAs are designed to be used instead of employer-sponsored pension schemes by employers who do not wish to sponsor such schemes. They can also be used to facilitate Additional Voluntary Contributions (AVCs) and as a substitute for personal pension schemes. Employers must offer access to at least one standard PRSA for any employee who is not eligible to join an employer-sponsored pension scheme within six months of starting employment, and must offer a PRSA for AVC purposes if there is no facility for AVCs within the scheme.

Personal Pension Plan

Personal pension plans are arrangements generally made by a self-employed person or an employee who is not a member of an employer-sponsored pension scheme. An employee may not obtain tax relief on contributions to an employer-sponsored pension scheme and a personal pension arrangement at the same time in relation to the same employment. However, if you have more than one employment or are also self-employed, you may be able to obtain tax relief on contributions to both personal pension plans and employer-sponsored pension plans.

Regardless of the type of pension scheme, the tax relief available, as outlined above, remains the same.

Recent Changes

As of January 1 last, individuals are no longer able to qualify for relief from PRSI in respect of pension contributions. Prior to this date, relief was available in relation to the PRSI and Health Levy. The Health Levy was incorporated into the new Universal Social Charge (USC) from January 1 and no relief from the USC is available in respect of pension contributions.

Relief against employers' PRSI for employee pension contributions was reduced from 100pc to 50pc from January 1. Unfortunately, this could prove to be a disincentive for employers to set up employer-sponsored pension schemes for employees in the future.

The Finance Act 2011 placed a lifetime limit of €200,000 on the amount of the tax-free retirement lump sum. Any lump sum payments above €200,000 will be taxed (see table 2, left).

Finally, as part of the recently announced jobs initiative, the Government now imposes a 0.6pc levy on the market value of assets which are managed in pension funds and pension plans approved under Irish tax law. These include employer-sponsored pension schemes, personal pension plans and PRSAs. This levy is intended to last four years but will not apply to retirement benefits to non-residents or to pension schemes which were wound up prior to May 10, where the employer sponsors are insolvent and no longer in business.

Conclusion

Ensure that you have a pension in place that will provide you with sufficient funds in retirement. Saving for retirement makes sense and, at a time in which more tax incentives are being removed or restricted by tax law, pension contributions still offer attractive tax relief. There are options to consider at retirement, so professional advice should be obtained.

Bernard Doherty is a tax partner with Grant Thornton

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