Business Personal Finance

Wednesday 21 March 2018

Should I pay into new pension being offered by my company when the old one is closed?

In the new pension, you have the opportunity to pay 10pc of your basic pay and the company will match that amount.
In the new pension, you have the opportunity to pay 10pc of your basic pay and the company will match that amount.

Peter Griffin

I work for a large dairy company. It recently informed us that the defined benefit pension it has offered for many years will close at the end of this month - and be replaced by a defined contribution (DC) scheme.

The company has guaranteed to pay all we have built up in the defined benefit scheme. I have 42 years service with the company and have another 18 months to go to reach retirement at 65.

In the new pension, you have the opportunity to pay 10pc of your basic pay and the company will match that amount.

Seeing as I have so little time left with the company, should I pay this 10pc into the new scheme - or would I be better off not to join the new pension and pay into Additional Voluntary Contributions (AVCs) instead?

John, Mitchelstown, Co Cork

You should join the new DC scheme rather than make AVCs. If you pay 10pc of your basic pay and your employer matches that with a further 10pc contribution, that is the equivalent of a 100pc return on your contribution.

By making an AVC under the defined benefit plan, you will not get the benefit of the employer contribution. You can of course make AVC's above the 10pc required contribution to the DC scheme if you wish to.

I have a couple of questions about the pension entitlements I will have when I retire.

I am 53 years old and married with two children. I have been self-employed since 1998. I was employed from 1989 to 1998.

I have a small pension that I make contributions to whenever I can.

However, with the recession, a period of seven years went with no contributions at all. I am wondering what State pension entitlements I'll get when I reach retirement - retirement age will probably be 68 by then. My wife works full time also and has done so for the last 32 years.

Donnacha, Wexford Town

Under the current terms of the State contributory pension, you qualify for benefits if you are aged 66 or over and satisfy the social insurance contribution conditions.

To qualify for the State contributory pension, you must have started paying social insurance before reaching the age of 56 and have paid at least 520 full rate social insurance contributions. In addition, to qualify for the maximum benefit (€233.30 per week), you must have paid or been credited a yearly average of 48 full rate contributions from 1979 to the end of the contribution year before you reach the age of 66.

To qualify for the minimum benefit (€93.20 per week), you must have paid or been credited a yearly average of at least 10 full rate contributions since 1953 or from the year you first started insurable employment (whichever is later) to the end of the tax year before you reach the age of 66.

Full rate social insurance contributions are PRSI contributions at Classes A, E, F, G, H and N. Self-employed rate social insurance contributions are PRSI contributions at Class S and are counted as full rate contributions for the purposes of the State contributory pension.

Given that you have a mixture of employed and self-employed contributions, I suggest that you contact the Central Records Section of the Department of Social Protection (Lo Call: 1890 690 690) to request a copy of your social insurance record. This will allow you to calculate the level of State pension you have secured by your qualifying contributions to date - and you can then estimate the level likely at 67. If your wife continues to work, it is likely that she will qualify for the maximum benefit on reaching the then retirement age.

I am self-employed and preparing to file my tax return for 2015 in a few months time. I only became self-employed in late 2014 and simply have not had enough money to pay into a pension - until now.

Is it still possible for me to open a personal pension now, pay a contribution into it for 2015 - and get tax relief on that 2015 contribution? And how exactly would I claim that tax relief?

Mary, Kilkenny City, Kilkenny

You can take out a Personal Pension or PRSA now and if you make a one-off contribution before October 31, 2016 or the Revenue Online Service (ROS) deadline, you can backdate the contribution to the 2015 tax year.

If using ROS, there will be a section dealing with pension contributions. Insert the total amount contributed for the tax year in question in this section. The personal pension plan provider will issue proof that the contribution was paid and if requested by Revenue, you can forward this certificate to the tax authorities.

You can make an annual once-off contribution to your plan or combine that with regular monthly contributions. It is very common for self-employed individuals to make one-off contributions annually and usually in respect of the previous tax year.

I recently opted to take a lump sum and invest the rest of my pension in an Approved Retired Fund (ARF) and an Approved Minimum Retirement Fund (AMRF).

Neither the financial adviser nor the pension company's representative with whom I discussed the decision mentioned entry charges.

When I received the plans, I was surprised to see that there is a 5pc entry charge.

Before withdrawing from the plans (I'm still in the cooling-off period), are there other providers who charge less on ARF and AMRF plans?

Declan, Howth, Co Dublin

First of all, once you are within the cooling-off period you can cancel the arrangement at no cost.

With regards to the charges under the policy, there are a number of issues here.

It is worth saying that you should expect to pay something.

Charges can be broken down into two phases - firstly, the upfront charge, which is likely to be somewhere between 0pc and 5pc.

Sometimes you will be offered a higher allocation rate (that is, the percentage of your money which is used to buy units in a pension fund) - but this is likely to mean that the second set of reoccurring annual charges will be higher.

The higher allocation rate may also mean a lock-in period that involves an early termination penalty.

The second set of charges are the annual management charges (AMC) levied on the total value of your fund each year. These charges are often skipped over.

In fact, it is the AMC that should command the most attention.

Under an ARF, an AMC can vary between 1pc and 3pc annually, depending on the type of investment funds involved and the commission paid to the financial advisor or broker.

It is important to discuss what charges are likely to apply to any pension or investment product that is being offered to you.

To choose the right pension, seek advice from an independent financial advisor.

Sunday Indo Business

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