Pension plans: how to maximise your financial position
The recently announced National Pensions Framework will not be implemented until 2014 at the earliest. Experts share their tips on how to maximise your financial position, writes John Cradden
THE Government's recently announced plans to reform the pensions system over the coming years is likely to have sparked much food for thought on the subject of pension planning.
The publication of the National Pensions Framework (NPF) earlier this month revealed plans to gradually raise the retirement age to 68 by 2028, cut the tax relief on pension contributions to a single rate of 33pc and introduce an "auto-enrolment" public-pension scheme for all workers.
The other big change is that the value of the tax-free lump sum will be capped at €200,000, so any amount above this level will be taxed at 20pc.
At the moment, those in a pension scheme are entitled to draw down a tax-free lump sum of up to 25pc of the fund's value at the point when they retire.
There are a few other changes, too, but the overall NPF will not be implemented until 2014 at the earliest and possibly beyond that, according to Social and Family Affairs Minister Mary Hanafin.
Changes to the pension system had been flagged for some time, but the delay in their announcement frustrated many in the pensions industry because they said many people were putting off pension planning until it was clear what the changes would be.
"The framework has both positives and negatives, but it does give people some degree of clarity on the direction the Government is taking on pensions," says Fionan O'Sullivan, director of IFG Corporate Pensions.
However, he and others add that there are still a lot of questions to be answered about the new plans, particularly the new public auto-enrolment scheme.
But, at the very least, we now know that most of us will have to factor in an extra one to three years of pensions contributions before we retire, and that tax relief on contributions will rise or fall depending on what tax bracket we are in.
So when it comes to our pension planning, what should we do next? We asked some pensions experts for their thoughts.
The move to cap tax-free lump sums was widely expected, and will lead many people to retire earlier than expected in order to avoid this change. "The cap of €200,000 pushed many to retire before last year's Budget and more have followed this year," says Michael Kiernan, CEO of Myadviser.ie.
However, experts add that the change will only affect a small minority of people, as you would need to be on a salary of more than €134,000 when you retire, or your total retirement fund value would have to be higher than €800,000.
Maximise your contributions
At the moment, you get tax relief on pension contributions at either 20pc or 41pc, depending on which income tax bracket you are in.
But this will be changed to a single rate of 33pc in four years' time, regardless of your income.
"Anyone on 41pc tax should consider maximising their pension contributions for the next four years," says Liam Ferguson of financial advisers Ferguson and Associates.
For those closer to retirement and looking to maximise the value of their pensions or cover any shortfalls, AVCs (Additional Voluntary Contributions) allow you to build up an additional fund, within Revenue limits. "Maximise your AVCs and avail of the 41pc tax break now," says Mr Kiernan. "Even if you are targeting the maximum pension, it is probable that there is scope to improve your pension via AVCs."
If you are a member of a defined contribution (DC) scheme, the framework may offer an incentive to put off the retirement date until 2011. This is because those in such schemes do not have access to Approved Retirement Funds (ARFs), but this rule will change next year.
ARFs are funds that allow you to continue investing some of your retirement fund as well as drawing down a regular pension income at a rate of your choice.
At the moment, those in DC schemes can only take out an annuity, which gives you a fixed income for life. But if you happen to die shortly after retirement, your entire fund cannot be passed on to your spouse.
"Lots of people object to being locked in to buying an annuity, largely because it dies with them, and if they die shortly after retirement, all their fund is gone, which might represent the fruit of 40 years' work," says Mr Ferguson.
Restructure your benefits or salary
Aidan McLoughlin, managing director of the Independent Trustee Company, suggests restructuring your benefits or salary but keeping the funding rate as high as possible.
"Most employers will be looking to do this anyway so it is worth your while getting involved in this exercise," he says.
When negotiating with your employer, you could try and reduce or even eliminate your own contributions to the scheme, since employer contributions will not be affected by the changes to the tax relief, says Mr McLoughlin.
If this doesn't work or give you the benefits you want, you may need to keep negotiating.
"This could involve your future salary being reduced in return for more substantial pension benefits," he says.
"This needs to be managed quite carefully, though, as there are Revenue rules in relation to salary sacrifice that need to be managed."