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Tuesday 19 September 2017

Advice: How much do you need to save a month for an annual €15k pension

It is vital that you get independent investment advice
It is vital that you get independent investment advice

Martin O'Sullivan

Personal pensions appear to have lost some of their appeal, certainly among farmers, in the past ten years. This can be put down to a number of reasons not least a severe drop on fund values in 2008 because of the economic meltdown.

The drop on average was in the region of 33pc which understandably cooled people's interest in investing in pensions. A further reason is that following the relaxation in milk quota leasing rules in 2008, farmers paying high rates of tax opted to go the limited company route as a means of reducing their tax liabilities.

Company directors also have the option of a company pension scheme open to them which can be quite attractive but in this article I will concentrate solely on personal pensions.

A personal pension plan is simply a long-term investment that aims to help you build up a pot of money that you can use to either provide an income for yourself when you retire or simply to have a nest egg to draw on as needed. The value of the benefits payable to you depends on the level of contributions you have paid and the investment return achieved from the funds in your personal pension plan.

The last six years have seen continuous positive growth in pension funds so maybe the time is right to consider investing in a personal pension.

The reality is, you are never too young to start saving for your retirement. Remember, your retirement is likely to be the longest holiday of your life, so the earlier you start saving the better. As you can see from the illustration set out on table 1, if you want a pension of €15,000 per year at age 68 and you start at 30 it will cost you €300 per month but if you don't start the pension until age 50 it will cost you €950 per month.

BENEFITS

At retirement a pension fund will be available to you and you can take 25pc of this fund as a tax free lump sum. Traditionally the balance of your fund was used to purchase an annuity (pension).

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This ensures that a guaranteed regular income is paid to you, generally on a monthly basis for the rest of your life. The actual size of your monthly pension will depend on the size of the fund, your age, when you retire, and prevailing annuity rates.

The annuity rate is the percentage of the fund that the pension provider will pay you. So let us say that you had a fund of €100,000 and the annuity rate being offered was 4.75pc, well then you would get a pension of €4,750 per annum or €396 per month.

The annuity rate will depend firstly on prevailing investment returns and your age but also on whether you require indexation and or an extended guarantee period or have it paid jointly with your spouse whereby a pension continues to be paid to the longest survivor. Generally the more options of this nature you exercise the lower the amount of your annual pension.

A number of options are available to you when your pension fund matures:

Take 25pc of your fund by way of tax free lump sum. This option will be exercised in the vast majority of cases irrespective of what you do with the remaining 75pc of the fund. The remaining 75pc can be used to:

Purchase an annuity ie, take up a pension which means you no longer have any control over your pension fund and generally after five years have elapsed if you die the fund dies with you. If you need regular income this might be the most suitable option.

You can transfer your retirement fund into another investment described as an ARF or an AMRF which are detailed hereunder. Opting for either of these will mean that the fund is still yours and assuming you haven't drawn it all down before your death, it will be there to pass on to whom so ever you wish after your death.

APPROVED RETIREMENT FUND (ARF)

If you have a guaranteed income of €12,700 per annum, which can include a State Pension, or if your fund exceeds €63,500 (which you have invested in an AMRF) you can invest in an ARF. From this you draw income as required or even draw the entire fund subject to income tax at your marginal rate. This allows full access to your fund and makes estate planning feasible.

APPROVED MINIMUM RETIREMENT FUND (AMRF)

If your fund is less than €63,500, or you don't have guaranteed income of €12,700, you can invest your fund in an AMRF. Before you reach age 75 you can only draw interest from the fund to ensure it does not run out. At age 75 you can make withdrawals from the fund but as with the ARF withdrawals are subject to tax. At any stage you can draw down the whole fund in order to purchase an annuity.

TAX TREATMENT

Contributions towards Personal Pension Schemes are fully tax allowable subject to certain limits.

Single premium contributions can be made right up to the filing date for your annual tax return which means that you have at least 10 months in which to determine how much you could or should pay to minimise your tax liability. The income ceiling for tax relief on pension contributions is €115,000.

In other words you are only allowed claim relief on income up to €115,000 if you are in the happy position of having an income greater than that. When your pension matures it depends on which option you take with your fund as to how and when you will be taxed.

If you opt for the straight forward annuity route and assuming you take your 25pc tax free lump sum, you will be liable for income tax and Universal Social Charge at your marginal rate on the pension you receive.

INVESTMENT ADVICE

When starting a pension or PRSA, or reviewing your retirement options, it is vital that you get independent investment advice.

You are best advised to deal with a reputable broker who has access to a wide range of pension products rather than a bank or institution which may be limited to one provider.

Since people are generally living longer, the average man lives to age 79, while the average woman lives to 83, if you were to retire tomorrow could you see yourself 'enjoying' a healthy and active retirement on the state pension of €238.30 (single) or €451.80 (spouse + adult dependant) per week.

Instead you would prefer to maintain your current standard of living and with this in mind perhaps you should organise additional retirement benefits through a personal pension.

Pension legislation has changed in recent decades and the scope and variety of options has increased enormously.

Martin O'Sullivan is the author of the ACA Farmers Handbook. He is a partner in O'Sullivan Malone and Company, accountants and registered auditors; www.som.ie


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