This means you’re on your own and you need to navigate the tricky pensions minefield yourself. The good news is there is plenty of advice out there but the best advice I can give you is to start early. The outcome of compounding interest can be huge and the earlier you start the better things will be for you. There is no pensions secret it’s all about how much you can contribute. It’s an exercise of how much can you sacrifice now to be more comfortable in the future.
There are 2 huge factors that are assisting you as a PAYE employee:
- You can get tax relief of up to 40% on your pension contributions this means the government are willing to give you €40 back on every €100 you put in.
- Pensions grow tax free, this is a massive benefit. The taxation on investments is called exit tax and is 37% * correct as of march 2018. This means any savings you have out with a pension you lose 37% of the growth in tax. Pensions are exempt from this so you don’t get taxed on any of the growth. This allows the fund to grow much more efficiently.
This all depends on how much you need or want in terms of income in retirement.
Use our pension calculators to get an indication of how much certain levels of contributions will amount too based on your current age and proposed retirement age.
As a PAYE employee any additional contributions you make in any of the above mentioned pension policies will be in addition to the state pension.
The state pension entitlement is approximately €250 per week when you are eligible, if you contribute enough to a pension to accrue another €250 per week income, your income in retirement will be €500 per week, any personal pension contributions doesn’t reduce your state pension entitlement.
Another way to assess your pension savings requirement would be to find out what it would cost to accrue a fund that would produce the income you are targeting in retirement , our calculator will tell you how much you need to save to achieve this using some assumptions based on estimated growth.
As you would expect “terms and conditions” apply to the amount you can contribute to a Pension for tax relief purposes.
Basically the amount you can contribute is related to your age with the following rates applicable: *correct as of march 2018.
- Under 30 15% of Earned Income
- 30 – 39 20% of Earned Income
- 40 – 49 25% of Earned Income
- 50 – 54 30% of Earned Income
- 55 – 59 35% of Earned Income
- 60 plus 40% of Earned Income
Without your own pension, you will be dependent on the State pension – provided you qualify. (See state pension category for further information) The State pension is less than €250 per week. *Correct as March 2018.
You need to claim for the relief by contacting revenue, the process is simple and quick. You supply the pension paperwork you are given by your chosen provider showing the contributions you are making along with a copy of your P60 showing your earnings for the year in question. You can receive the tax relief as a monthly tax credit each month or an annual credit whichever you prefer. Often this can be organised through email to revenue.
You have 2 main choices of pensions when employed:
- A Personal Retirement Savings Account (PRSA)
- A Personal Pension Plan (PPP)
A Personal Retirement Savings Account (PRSA)
PRSAs are an off the shelf ( more simple) pension option suitable for employed individuals who want to pay into a pension – PRSA’s can be started and stopped at any time and allow once-off (lump sums) or regular monthly contributions. There is no minimum amount you have pay into a PRSA so they can be a more suitable pension product for those starting a pension for the first time. The charging structures for PRSA’s are very transparent with a maximum of 1% annual management fees and a minimum of 95% allocation rates. You are limited to what funds for investment are available on a PRSA. There is also a product called a non-standard PRSA.
A Personal Pension or ( PPP)
Personal Pension are perhaps the most popular choice for employed individuals. This is a policy both you and your business can contribute to and receive tax relief on at your Marginal rate of 20 or 40%. There can be minimum contributions required but you have a wide choice of fund options to choose from. Charges are also deemed to be lower on PPP’s when compared to PRSA’s but that might not always be the case. When investing in a PPP you will be risk assessed to see your attitude to risk in investing. A portfolio of funds will be available that matches your attitude to risk.
Find out what charges you will pay ?
Charges have a huge impact on your pension growth. Pensions grow tax free which makes them the most suitable product / option for saving for retirement but any charges or fees can reduce this tax free growth. Annual management charges or AMC is an annual fee taken by the fund manager who invests your pension money or fund. This can be anywhere from 0.5% – 1.5% or more per annum depending on what fund you are invested in or how much you have in your fund. The lower this is the better but you do have to pay higher fund charges for some funds like property or actively managed funds because of the expense of administering these fund choices. Just be aware of the AMC’s you are being charged on your pension.
What allocation rate does you pension have ?
The allocations rate is the % of the investment that goes into the pension. If you have a 100% allocation rate then 100% of the money you are investing / contributing goes into the actual pension and there is no charge. A 95% allocation rate means from a €100 per month contribution, €95 goes into the pension and €5 is a charge so only 95% of the money you are investing is actually going into your pension. Typically an allocation rate would be between 95-100% depending on what type of pensions and how much you are investing. The higher the allocation rate the better for you as the investor.
Policy fees or ongoing management charges ?
Sometimes there can be other fees and charges on a pension such as bid offer spread , policy fees or trail commissions. You can also experience early encashment charges if you try to get out of a product or fund early. Make sure your advisor discusses all charges with you so you know where you stand and you feel comfortable with any and all charges that might be on your pension product. There can be reasons for all of the above charges but you want to make sure you are getting value for money which is why it is good to shop the full Irish market of pension providers and deal with an advisor who has multiple options to get you the best value.
This is one of the most important decisions you will make in regards to your pension. It’s really important that the funds you invest in are suitable for your attitude to risk. Your attitude to risk is how you view the opportunity to get growth or lose money in investing in your pension. If your nervous about the value of your fund losing money and cautious about investing you should be in a low risk fund that doesn’t expose your fund to high risk / potential losses. If your adventurous and want to aggressively grow your fund you do need risk and market exposure. This is one of the most important discussions to get right with your advisor. A comprehensive risk assessment questionnaire will outline your attitude to risk and then you can look at funds to match this.
Funds put simply are
- Low risk
- Medium risk
- High risk
Some are very low risk , low or high on the medium scale or very high risk.
The main asset classes are ,
- Equities – Stocks and Markets (High Risk)
- Property – Commercial (Medium / High)
- Commodities – Oil , Gas, Gold etc (Medium)
- Bonds – Government or Corporate (Low / Medium)
- Cash and deposits (Low)
A varied group of funds with diversification and a variety of assets classes is the most efficient fund choices as you will be able to reduce risk , maintain growth potential and keep annual management fees lower.
You also have to get some advice on this and a good advisor is worth their weight in gold. Be prepared to take some investment risk with your pension – particularly if you are young. Understand – and be comfortable with – the degree of investment risk which you may be taking on and remember past performance isn’t a reliable indication of how a fund will perform in the future.
In general, allocation rates tend to be better on a personal pension plan but typically early surrender penalties [charged if you cash in an investment early] apply. A PRSA on the other hand will have lower allocation rates but will not have early surrender penalties.
You are in a good position and make sure you maximise both your own contributions and the contributions your employer is willing to make on your behalf. I often see people only paying 3% with their employer matching this when 5% contributions will trigger a 5% contribution or more from their employer. This will make all the difference come retirement and you receive tax relief on the 5% your pay in. You also have the option to choose what type of funds you are invested in. Do our risk assessment questionnaire and make sure your fund choice are aligned to your chosen funds
You may also be able to make Additional Voluntary Contributions or AVC’s. if you are in a defined benefit scheme based on your salary and years’ service. You might be able to top your pension up to get the maximum available tax free lump sum and monthly pension when you retire.