independent

Wednesday 16 April 2014

Know what pension scheme you are on and avoid pitfalls later

It pays to put some time into trying to work out what state your pension is in.

IT pays to put some time into trying to work out what state your pension is in.

But how do you know if your pension is in trouble or in a healthy position?

Here are some pointers for the different types of pension out there.

* Defined benefit scheme

Most defined benefit (DB) schemes are struggling to meet the promises on retirement income made to their members.

With one of these schemes you get a pension based on a set amount of your final salary, and based on your years in the scheme.

For those with a full 40 years' service in a scheme that is fully funded, this means getting two-thirds of their salary at retirement.

But the majority of schemes cannot keep this sort of promise. There are now around 800 DB schemes -- down from 2,500 a few years ago.

Check out if the scheme is in deficit, and to what extent?

Ask the trustees if the scheme has had to be restructured; and if it has, find out what this means for your benefits.

* Defined contribution or PRSA

Private-sector occupational pensions are increasingly defined contribution ones or PRSAs (personal retirement savings accounts).

With these, the pension you get depends on the amount of money being put into the fund (by you and your employer), the length of time your are putting money in, and the investment return.

You need to dig out the annual statement sent to you by your pension provider and check the projected pension you are due to get when you retire.

See if you could live on this. If not you need to contribute more.

* Public sector

Civil service and local authority pensions are funded on a pay-as-you-go basis out of current taxation. According to the Organisation for Economic Co-operation and Development (OECD), public sector pensions are hugely generous compared with those in the private sector in Ireland.

However, pensions in semi-state bodies such as the ESB have a fund and tend to be like private sector defined benefit schemes.

If the fund is in deficit then the pensions benefits have to be reviewed and lowered.

* Saving more than investing in pension

If you are putting more money into a savings account in a bank or credit union than you are putting into your pension, then you are probably making a mistake.

Savings are short-term, whereas a pension is a long-term, tax efficient way to provide an income for when you stop working.

If you pay income tax at the top 41pc rate, then the Government gives you a massive tax break for putting money into a pensions. Effectively, you can put €100 into a pension at a net cost to you of €59 because of this tax break.

Irish Independent

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