Sunday 18 February 2018

Future focus

Money may be tight at the moment, but setting up an additional voluntary contribution to your pension now can maintain your standard of living in later years, writes Charlie Weston

Aoife Ward (5), Zara Paolozzi (6) and RTE weather presenter Karina Buckley prepare for a rainy day at Women and Pensions Day this year
Aoife Ward (5), Zara Paolozzi (6) and RTE weather presenter Karina Buckley prepare for a rainy day at Women and Pensions Day this year

WITH money tight and stocks and shares falling in value like stones, the temptation might be to turn your back on pensions.

But personal finance experts argue that paring back on pensions in straitened economic times is the wrong approach.

Instead, those who have not got a pension should now take one out and those who have an inadequate pension should sort it out now.

For those whose pension is not up to the job of providing them with a decent retirement income, additional voluntary contributions (AVCs) could be the difference between making ends meet and actually enjoying your retirement.

Many workers join pensions late or have broken service. AVCs are a way to make up for lost time. They can also boost retirement income where the underlying pension scheme doesn't offer a very high level of benefit.

AVCs run alongside employers' pension schemes and allow employees to pay extra into their pension which should result in a larger pension pot at retirement.

AVCs benefit from the same tax relief as contributions paid into the main pension scheme, so it makes sense to benefit from this tax-efficient way of saving for retirement.

The maximum tax relief for people under 30 is 15pc of their net earnings. People aged 30-39 can contribute up to 20pc, while people in their 40s can get tax relief on up to 25pc.

The limit rises to 30pc of net earnings for people aged 50 and over, by which time people have finally got around to checking their projected pension estimates and begun to panic.

Personal finance expert and founder of www.askaboutmoney.com, Brendan Burgess, says most AVCs are invested in equities. Rather than running scared of equity-related pensions or investments, now is the time to pile into shares because they are cheap at the moment.

"There is great value in the markets at the moment. AVCs are a long-term investment. As long as the charges are low or modest, then AVCs which are invested in equities are a very good way for providing a future income," Mr Burgess said.

Liam Ferguson of Ferguson and Associates also counsels against rejecting AVCs just because stock markets are falling.

"It's a fundamental principle of long-term investing that if you want to achieve higher returns, you must accept higher risk and volatility along the way. So your fund will go down as well as up in value."

All pension products are losing money at the moment, and AVCs are no different.

But if you are prepared to take a long-term approach to securing your future income, then AVCs are worth considering. Anyone already in an occupational retirement plan can make AVCs, ie an employee who is a member of their employer's pension scheme or a company director who is also a member of the main scheme.

Efficient

AVCs are tax efficient in three different ways, according to Aaron McCann of Dublin-based Citadel Financial Advice.

Firstly, they allow you save for your retirement and get full income tax and PRSI relief at the rate applicable to you.

This means that if you are paying income tax at the marginal rate of 41pc and PRSI at 6pc you will receive relief of 47pc on every euro you invest into your AVC fund.

So, if you contribute €100 per month into your AVC fund and are paying tax at the marginal rate, it will only actually cost you €53 out of your own pocket.

The second element of the tax efficiency is the fact that the AVC fund grows tax free -- there is no capital gains tax payable on the growth of your AVC fund.

Thirdly, your entire AVC fund could be taken entirely tax free at retirement should your service and final pensionable salary allow and your tax free lump sum is below Revenue limits.

Often the main scheme rules only provide for 50pc of final salary at retirement as a pension.

An AVC fund can supplement this 50pc up to the Revenue maximum of 66pc of your final salary if extra income at retirement is what you need -- as long as you have at least 10 years of pensionable service.

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