Are you contributing enough to your pension today to support you throughout your retirement? It is never too early to start saving for your retirement.
What is a Pension Plan?
Pension Plans are long-term saving plans designed to provide you with an income in retirement. The regular contributions you make to your pension fund benefit from generous tax relief, greatly reducing the real cost to you, while at the same time enjoying tax-free investment growth. Pensions are different to other saving plans due to these tax incentives which make them an attractive method of saving for retirement.
As life expectancy increases it means that we can look forward to a longer retirement. A longer retirement naturally means we are going to need more money to enjoy it and therefore pensions are more important now than ever.
In order to help provide for your future, starting a pension is one of the smartest financial decisions you can make.
Why have a Pension?
- Tax efficient method of saving
- Tax relief on contributions paid into the fund
- Fund grows tax free
- Tax free lump sum at retirement
- Greater financial security during your retirement
- State pension is not adequate for majority
Type of Pensions?
There are many different types of plan to choose from, depending on one’s circumstances – Occupational Pensions, Personal Pensions, Executive Pensions, AVC’s and PRSA’s.
Pension contributions are invested in a range funds across specific asset types - stocks, shares, property, commodities and cash to match your risk profile. Payments can be made by way of salary deduction, regular monthly or annual contributions or single premium lump sums.
Pensions are a complex financial product but, as financial brokers, we have the experience and expertise at LMFS to give you unbiased advice and help you find a plan, tailored to your specific needs and budget.
Pension Terminology Explained
Personal Pension Plan
Personal Pension Plan is a pension scheme open to self-employed individuals, partners in a partnership, or employees who are not members of an occupational scheme.
Personal Retirement Savings Account (PRSA)
A PRSA is a flexible, low-cost, transparent pension plan that can be taken out by any resident of the state, regardless of employment status. You, and your employer if any, can make tax-deductible contributions to a PRSA. A PRSA is fully portable if you change your job or employment status, and you can stop and restart making contributions at any time. There are two types of PRSA’s - Standard and Non-standard. One feature of a Standard PRSA is that the charges are limited by legislation. The fund choice is greater for Non-standard PRSA’s, but charges can be much higher.
Occupational Pension Scheme
An Occupational Pension Scheme (sometimes known as a Company Pension Scheme) is organised by an employer to provide pension income to one or more employees on retirement or to surviving dependants on the death of an employee. The employer always makes contributions and the employee may make additional contributions, depending on the terms and conditions of the scheme. Occupational schemes can be Defined Benefit or Defined Contribution.
Defined Benefit Scheme (DB)
Defined Benefit Schemes provide members with retirement and death benefits based on formulae set out in the rules of the scheme. Benefits are usually based on the member’s salary close to retirement and on their pensionable service. These schemes are very attractive but are becoming more and more of a rarity because of the high funding costs.
Defined Contribution Scheme (DC)
Defined Contribution Schemes (also known as Money Purchase Plans) provide pensions based on the accumulated value of contributions paid to a pension scheme and the investment returns earned on those contributions.
Executive Pension Plan
An Executive Pension Plan is a small company plan suited to directors or employees in an SME and it can be set up by a company for any individual in its employment. The company makes contributions to the plan, and same are deductible against corporation tax. The employee can top up those payments with personal contributions which are also tax deductible.
Default Investment Strategy (DIS)
Default Investment Strategy (DIS) is a service offered by most pension managers to protect funds from market volatility prior to normal retirement age. A DIS will pursue a higher risk /higher growth strategy for younger clients, whereas a low risk / modest growth strategy will be more suitable for someone approaching retirement. During the five years before your selected retirement date, monies invested in higher risk assets will be switched into more secure funds on a phased basis.
An annuity is a guaranteed income for life. On retirement the available fund is used to purchase an annuity. An annuity does not carry any investment risk and was very popular option when interest rates were higher and the level of income guaranteed was considerable. However, low interest rates have resulted in annuities being much less popular at present.
Approved Retirement Fund (ARF)
At retirement the accumulated pension fund can be transferred into an ARF which is a retirement fund that allows you to keep your money invested as a lump. Funds can be withdrawn from an ARF as required by the owner. The balance can be used to purchase an annuity, an ARF or an
Approved Minimum Retirement Fund (AMRF)
If at retirement the plan holder opts to have the available funds transferred into an ARF the sum of €63,500 must first be invested in an AMRF unless the owner has a guaranteed pension from other sources of €12,700 p.a. These are all designed to give you income for life and which is best is very much down to the individual. The capital value of an AMRF may not be eroded before age 75, but growth may be drawn as income in the interim.
Additional Voluntary Contributions (AVCs) are additional contributions paid by a member of an occupational pension scheme in order to secure benefits over and above those set out in the rules of the scheme. Where an occupational pension scheme does not provide access to an AVC facility, a standard PRSA must be offered for this purpose.