Sunday 23 October 2016

Take control of your retirement

Do your homework in the weeks and months leading up to claiming your pension, writes Louise McBride

Published 25/10/2015 | 02:30

Ensure your golden years are free of financial strain by taking action in the months leading up to retirement
Ensure your golden years are free of financial strain by taking action in the months leading up to retirement

From tracking down any old pensions to applying for the State pension to getting your pension lump sum, the run up to - and week of - your retirement can be a hectic time. So it's a good idea to know exactly what you have to do the weeks leading up to your retirement. Here's our ten-point guide to getting it right during this important time.

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One: Check your PRSI record

It is your PRSI record - that is, the breakdown of your social insurance contributions over your working life - which will ultimately determine whether or not you're entitled to the full contributory State pension. So be sure to check this in the run up to your retirement so that you can find out how much of a State pension you'll get. Should it be the case that you won't get as much of a pension as you had expected to, you will need to prepare yourself financially for that.

Two: Apply for the State pension

To apply for the State pension, you must complete a State Pension (Contributory) form or a State Pension (Non-Contributory) form, depending on the type of State pension you are entitled to. You can get these forms from your local post or Social Welfare office. As you must be 66 years old to get the State pension today, you should apply for it three months before you reach the age of 66.

Three: Brush up on your private pension

You may have another private pension in place that will supplement your State pension. Before you retire, be sure you understand how your private pension works and what kind of payouts you are likely to receive from it, advised the Retirement Planning Council of Ireland (RPC). You can do this by either contacting your pension provider - or the person in your work who manages the pension.

Four: Track down your old pension

Don't overlook any pension you took out when you were younger - but which you may have long since forgotten about and stopped paying into. Find out the name of the pensions administrator if you took out a pension with an employer you have since left, or which has gone bust. The pensions administrator should bring you up-to-date on the value of your pension, as well as any changes to the scheme. Contact the Pensions Authority if you can't find out the name of the pensions administrator, or ask previous colleagues who also worked with the employer.

It's important to tell your current employer or pensions administrator what your new address is, should you move house. Similarly, be sure to pass on your contact details to any old boss or pensions administrator you previously took a pension out with if you have moved house since joining that scheme. Otherwise, the company in charge of your pension scheme could find it hard to contact you when you retire - and you could lose out on your pension as a result.

Five: Get your free perks

Be sure to claim the freebies you are entitled to when you retire. Under the State's Free Travel scheme, you are entitled to free travel on most State public transport (bus, rail and Luas service) as long as you are over the age of 66. You should get your free travel card automatically if you are getting a social welfare pension - as long as you have registered for your public services card. You can register for your public services card - the card used to collect social welfare payments - at your local Social Welfare office or Intreo centre.

Six: Brush up on your tax

"Once you retire, you become entirely responsible for your own tax affairs," said the RPC in its retirement check-list. "Many people do not realise that the State pension is potentially taxable - although you are unlikely to be liable for any tax if it is your only source of income. There may also be tax implications on any income you receive from other pensions, so be sure to speak to your pension advisor about that in advance."

You also need to bear Capital Gains Tax and Inheritance Tax in mind if planning your will.

Remember that you are entitled to a range of tax breaks once you reach the age of 65. For example, you no longer have to pay any tax on the interest earned on your savings unless your gross income is more than €18,000 - or €36,000 for a married couple You also may not have to pay any income tax - once your income is below a certain limit. Should you still have to pay income tax, you will be entitled to additional tax credits once you reach the age of 65 - which should reduce your tax bill.

Seven: Get the best lump sum you can

Those with private pensions are entitled to a pension lump sum when they retire - but the size of that lump sum will vary, depending on the pension scheme and the value of the pension. Find out what size of a lump sum you'll get when you retire, and ensure you get the exact lump sum you are entitled to.

There are two types of pension schemes: defined contribution and defined benefit.

With defined contribution schemes, you can take a lump sum equivalent to either one-and-a-half times your salary - or 25pc of your pension fund.

With defined benefit schemes, your lump sum is based on your salary and service - and can be up to one-and-a-half times your 'final remuneration'.

"With defined benefit, ensure that your pensions administrator uses the highest possible figure for your 'final remuneration'," advised Jim Connolly, head of pensions with Standard Life. "Imagine you earn €30,000 as salary and you get annual commission of €30,000 on average. The correct lump sum in this case is one-and-a-half times €60,000 and not one-and-a-half times €30,000 - that's a huge difference."

Ensure your pension administrator has all your correct details as they will be the ones calculating your pension benefits, advised Mr Connolly. "Imagine you have a defined contribution pension and you are entitled to a pension lump sum of one-and-a-half times your final salary - but your provider only has a note of your earnings from years ago," said Mr Connolly. "Your lump sum would be based on that considerably lower figure if that were the case."

Remember, the first €200,000 of your pension lump sum is tax-free - regardless of the type of pension you have.

Eight: Decide what to do with your lump sum

Make sure you know how to access any lump sum that you're entitled to when you retire - and know what you want to do with it, advised Declan Lawlor, consultant with the RPC.

"Be aware that you will have some decisions to make in relation to what now happens to that money - will you choose to invest it, and what kind of investment vehicles will you opt for if so?," said Mr Lawlor. "In deciding what to do with your funds, bear in mind how much risk you are willing to take, when you are likely to need access to the funds (whether you need the funds now or if you could leave them to grow) - and whether you have any other assets or income."

With defined contribution schemes, you have a choice of converting the money left over in your pension fund (after the lump sum is taken out) into an annuity or an approved retirement fund (ARF - a personal retirement fund).

"If you have taken a lump sum based on the one-and-a-half times salary rule, you are obliged to use the remainder of the fund to buy an annuity," said Mr Connolly. "An annuity is a fixed income for life based on long-term interest rates. It may suit people who want financial certainty in retirement."

Nine: Be on guard for dubious offers

Those with defined benefit pensions should be wary of any offers to exchange a portion of their annual pension income for a pension lump sum, according to Mr Connolly. "The problem is that the exchange rate of pension income to lump sum is very unfavourable," said Mr Connolly. "Most schemes exchange €1 worth of pension income for €9 of lump sum - so if you sacrifice €1,000 of your annual pension you could get €9,000 in a lump sum now. The problem is that value of €1,000 for a 65-year-old is probably closer to €20,000 - so it often doesn't make sense to make the exchange."

Ten: Start early

The week before, or of, your retirement is far too late to start planning your golden years.

Ideally, start your preparations for retirement at least a year beforehand, as this will give you the chance to increase the amount you're saving in your final working year - and therefore boost your pension pot.

"People need at least six months to prepare - and ideally 12 months if they want to boost the amount they're saving into their pension," said Mr Connolly. "Put as much money as you can afford into your pension in your final working year."

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