Starting a pension is one of the most important investment decisions you will ever make in your life. A well-funded and smartly strategised pension can provide you with a comfortable retirement and the peace of mind that comes with knowing that you will have a steady income stream to cover your lifestyle in your twilight years. Pension payments can also be used to help pay for medical expenses, long-term care and other unforeseen costs associated with the natural process of ageing. There are many different types of pensions available in Ireland, each with its own set of benefits. A pension should be tailored to fit each individuals' needs and desires for the future but no matter what type of pension you choose, there are a few key things you should keep in mind in order to get the most out of your investment.
Your pension plan should be flexible and it should be broad but above all else it should extend as far into the future as possible. Your money is your money and a pension plan should be thought of as a means to getting the most out of your assets. This means stretching your money as much as you can without breaking the bank. In order for a pension to last, contributions must be maximised in every way possible. Maximising your pension contributions is essentially carried out through smart financial planning and articulate use of reliefs, funds and a number of other methods we will discuss in this blog. By following the simple tips outlined in this blog post, you can ensure that your hard-earned money will go a long way towards securing your golden years.
The general rule of thumb when it comes to pensions is that the sooner you start contributing, the more time your money has to grow. The sooner you plan your pension the sooner you can begin to see how much further your money can take you. Pension contributions can be made through a private pension provider, directly from your own pocket or through your employer. If your employer does not offer you an occupational pension scheme, they are required by law to provide access to at least one Standard PRSA. PRSA stands for a Personal Retirement Savings Account and is a type of long-term personal pension plan that is available to both employed and self-employed people. It is designed to allow for flexibility when it comes to saving for your retirement and is seen as a contract between you and a pension provider in the form of an investment account. Crucially, tax reliefs are available on the contributions you make towards your PRSA, but we will return to that shortly.
The first, and simplest, way in which you can maximise your contributions through your PRSA is by checking to see whether or not your employer offers a pension contribution scheme. Many companies offer to match or top-up employee pension contributions and this can be a great way to boost your savings. The amount contributed through the scheme will vary from employer to employer with some company schemes opting to only contribute a percentage of what the employee contributes while others will match the employee’s contributions euro for euro. If your employer offers a matching contribution up to a certain percentage it is important to make sure you are putting in enough to meet this figure and getting the maximum contribution from your employer. This is essentially free money, so be sure to take advantage of it. It is advisable to check with the HR department in your company to see what kind of scheme is in place and how much they are willing to contribute.
In addition to checking whether or not your employer offers a pension contribution scheme, you should also take the time to find out whether or not they have a salary sacrifice arrangement in place. Salary sacrifice is a type of employee benefit that allows you to exchange a portion of your salary for a non-cash benefit, in this case, increased pension contributions.
Section 118B of the Taxes Consolidation Act 1997 provides for the taxation of salary sacrifice arrangements and defines a salary sacrifice arrangement as follows:
“Salary sacrifice arrangement means any arrangement under which an employee foregoes the right to receive any part of his or her remuneration due under his or her terms or contract of employment, and in return his or her employer agrees to provide him or her with a benefit”.
Salary sacrifice arrangements are becoming increasingly popular with employers as they offer a number of benefits for both the employer and the employee. This may be something to consider when trying to push the boundaries of your pension and how it will take shape in the future, but the flip side of this coin is a substantial hit to your pocket in the present.
Another way to make the most of your money is to take advantage of the tax relief offered on pension contributions. Pension contributions are eligible for tax relief at the highest rate of income tax that you pay, also known as the marginal rate. One further option is to make Additional Voluntary Contributions (AVCs). AVCs are extra contributions that can be made on top of the mapped out pension contributions you make. These additional contributions may fall under eligibility for the same tax reliefs as your regular pension contributions.
Income tax relief on PRSA contributions are available on an annual basis up to certain limits depending on age and the amount of your salary. Revenue applies a Pension Contribution Relief cap of €115,000 per year and any contributions above this will not be eligible for tax relief. Additionally, Revenue applies limits on the amount of tax relief you can receive based on your age, as seen below.
An example of the above in play would be the following:
Paula is 45 and earns an annual salary of €100,000. If she wishes to maximise her tax relief on her pension contributions, then the most she should contribute in a year is €25,000. Any contributions over this amount will not be subject to tax relief.
It should also be noted that employer contributions to PRSAs are no longer deemed to be benefit in kind since the last budget. PRSA and Occupational Pension Schemes are subject to revenue maximum funding calculation. The calculation also considers your years of service with your employer. Speak to one of our experts today to learn more about this.
Additionally, it should be recognised that there is a limit on the overall value of your pension pot that is eligible for tax relief. This limit is referred to as the Standard Fund Threshold. As of 2022, the maximum value of the SFT is €2 million and if the fund exceeds that limit, then several different tax calculations come into force. As you can see, careful financial planning is essential to make the most of tax relief and to navigate the complex web of rules and regulations that surround pensions in Ireland. To get the most out of your pension contributions it is advised you reach out to one of our pension experts here at FitzGerald Flynn Insurances.
An Approved Retirement Fund (ARF) is a pension product in the form of a post-retirement fund. Having made a claim on your pension you will have received your tax free lump sum. The remainder of the fund is then transferred to an approved retirement fund (ARF). Once the money is in the ARF, it will continue to be invested and grow. Gains accumulated in the ARF are tax free, however, Revenue have a 4% imputed amount that must be taken for funds less than €2 million and when you hit your 61st Birthday. This increases to an imputed 5% when you are 70 years old. And if you were lucky enough to have a fund in excess of €2 million, or even have your own personal fund threshold in excess of €2 million, then from age 61 you must take a 6% imputed amount from the fund. This allows you greater flexibility in how you use your money in retirement. But from 61 years of age if your fund does not grow by more than 4% net of fees then your fund will start reducing and could get boomed out before you die. Therefore it is always advisable to contact a financial adviser.
As you can see there are a number of ways to make the most out of your pension in Ireland. It is important to take the time to understand all of the options available to you and to seek professional advice to ensure that you are making the best decision for your individual circumstances. Especially as the future of how pensions operate in Ireland may be about to undergo a significant change. In March 2022, the Irish government set out the roadmap for a proposed Auto Enrolment system for pensions. The new system is due to be phased in from 2023-2024 onwards with a view to ensuring that all employees have a pension scheme in place. We are yet to see what this could entail for pensions in Ireland, but it is hoped that the new system will make it easier than ever for people to put money away for their later years.
In reality there has never been a better time to seek the help of a financial advisor to ensure that you are making the most of your pension. With so many changes on the horizon, it is essential to get expert advice to ensure that you are prepared for whatever the future may hold.
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