Why save for retirement?

Once you retire, you could suffer a sharp fall in your standard of living as you are no longer earning your regular wages or salary. So, if you want a reasonable standard of living you need to plan for your retirement. You can do this in a number of ways, such as:

• saving money in a savings account
• buying stocks and shares
• investing in property at home and abroad
• saving through a pension plan.

A pension plan is basically a long-term savings plan. You save regular amounts or lump sums, called contributions, to build up a retirement fund. Next to buying a home, it is probably the most important investment you will make in your lifetime.  The main advantage of a pension plan over other forms of saving and investment is the tax benefits available.  At present, the main tax benefits are:

• tax relief on your contributions
• tax-free investment growth
• an amount of tax-free cash when you retire.

How do pension plans work?

Life assurance companies and investment firms are the main providers of pensions in Ireland. They employ specialists called fund managers to invest your contributions in one or more pension funds.

These funds are used to buy and sell assets, such as shares, property, bonds, and cash. There are many types of pension fund, each invested in a different mix of these assets. 

A typical pension fund has:

• 50% of its assets invested in shares
• 25% of its assets invested in property
• 15% of its assets invested in bonds
• 10% of its assets are held as cash

The value of the fund rises and falls, depending on the performance of the shares, property and other assets in which it invests. The fund is expected to grow by a certain amount each year but this is not guaranteed and fund values go up and down over the years.  The value of your fund will be reduced by any fees and charges you have to pay.

Your pension fund is a long-term investment that you should ideally keep for 20 to 30 years. This gives enough time for your fund to recover growth after any short-term fall in value. Generally, the longer you keep your contributions invested, the more likely your fund will grow in value.

For this reason, the earlier you start saving for retirement the better. You will have more time to make contributions and more time for your fund to grow in value. Of course you will have to balance this with other financial needs such as buying your home.

If you don’t start a pension fund until your 40s, you will have less time to build up your fund. So you will have to pay much higher monthly contributions to give you the same pension you would have had if you started saving in your 20s or 30s.

What Tax relief is available on pension contributions?

For every €100 of your income that you invest in a pension plan, the real cost to you after tax relief is less. It costs you:

• €80 if you pay tax at 20%
• €59 if you pay tax at the top rate of 41%

If you are an employee, the real cost will be even lower as you can also get some relief on PRSI (pay-related social insurance) and health levy payments. If you are a member of an employer pension plan, you don’t have to pay tax on any contributions your employer makes.  The maximum in earnings that you can take into account for pension tax relief is currently €254,000 per year.  The percentage of your income you can get tax relief on for pension purposes depends on your age. It increases as you get older Age Maximum Annual% of net relevant earnings Up to 30 yrs 15% 30 to 39 yrs 20% 40 to 49yrs 25% 50 to 54yrs 30% 55 to 59yrs 35% 60 and over 40% NOTE: Automatic entitlement to tax relief is not guaranteed.  • The maximum net relevant earnings on which tax relief can be received is currently *€262,382 per annum. Any contributions that you make in a year that do not attract tax relief can be carried forward to future years. • Certain occupations are allowed to contribute the 30% limit irrespective of age.  Tax-free investment growth You don’t have to pay tax on the growth of your pension fund. This means, it can grow in value more quickly than a standard investment plan, where you have to pay tax of 23% on any growth you earn.  Tax-free cash when you retire When you retire you can take part of your pension fund as a tax-free lump sum. The amount you can take depends on the type of pension plan you have but it is generally 25%. It is important to remember that your regular pension benefit will be subject to income tax.

When can I take my pension benefits?

With most pension plans, you can take your pension benefits at any time if you become seriously ill and have to give up work as a result. Otherwise, the earliest you can take your pension benefits depends on the type of plan you have. Usually your money is tied up until you reach retirement age.

• If you have a personal pension plan, the earliest age you can take your benefits is 60. You can continue to work and contribute if you want, and delay taking benefits up to age 75.
• If you are a Personal Retirement Savings Account (PRSA) holder, you can take your benefits from the age of 50 if you are an employee and retiring from that employment. For others, the age is 60. As with a personal pension plan, you can continue working and contributing if you want, and delay taking benefits up to age 75.
• If you are in an employer pension plan you can usually take your benefits, including any additional voluntary contributions (AVCs) at 60 or 65. Some plans allow early retirement from the age of 50, with your employer’s consent.

People in certain occupations, such as professional sportsmen and sportswomen, are allowed to take their benefits from a younger age.