Pensions

Did you know that the average person spends 20-23 years in retirement and the current State pension is about one third of the average wage packet? The key issue to consider is quite simple – how will you pay your bills when you are older and no longer have a job? You will need some form of income, and along with any savings or investments you may have, pensions can play an important role in providing it.

There are two main groups of pensions - state pensions and all other pensions, which include personal pension plans, and employer pensions. You are entitled to a State pension when you retire. The various types of state pensions have been outlined below.

State pension (Contributory)

This is paid at age 66. You must have paid enough social insurance contributions (you can continue to work while receiving it).

State pension (Non-contributory)

This is paid at age 66 years You must satisfy a means test to qualify for this – it is for people who do not qualify for the contributory State pension.

This age of 66 years is due to increase to 68 years in 2028.

Other pensions (through an employer or set up privately) are a type of investment plan, used to bridge the gap between your current income and what you will get from the State when you retire.

If you have worked abroad or part-time for a period you may not qualify for a full contributory pension but you may still be entitled to a reduced contributory pension. If you left the workforce to care for children or an incapacitated adult or child, you may be entitled to extra credits called ‘home-maker’s credits’. These credits may help you qualify for a pension or entitle you to a higher rate of pension. They do this by using money you may have saved in a pension plan during your working life (pension contributions) and these can grow into a pot of money (pension fund), which can be used to provide you with a tax free lump sum plus a regular income (which is taxed) when you retire.

Employer Pensions, Personal Pensions and PRSA’s

If you want to try and bridge the gap between your current level of income and that which you may get in retirement, from your savings, from your employer or from the state, you may want to consider contributing to a pension provided by your employer or to take out your own pension plan.

If your employer offers a pension plan you may have to contribute to it as a condition of your contract. If you are employed, by law your employer must offer you a standard PRSA if:

• there is no employer pension plan in place through your job

• you are not eligible to join your employer pension plan within the first six months of your service

• you are eligible to join your personal pension plan but only for death-in-service benefits.

Employer pensions are either:

• defined benefit (set amount based on years of service and salary at retirement); or

• defined contribution (where your pension income depends on the contributions made by you and your employer plus any investment growth, less charges).

Employer pension plans are also called an occupational pension. You can only access this type of plan if your company provides one and you are eligible to join it. Your employer must make some contribution to the plan. The amount of contributions will depend on the rules of the scheme. The level of benefits depends on whether you have a defined benefit plan (set amount based on years of service and salary at retirement) or a defined contribution plan (estimated, which will be determined by the amount of contributions into the scheme, any growth, less any charges). You can top up on what you expect to get in retirement by making Additional Voluntary Contributions (AVCs). The pension provider will generally apply charges as a cost of running the scheme, the trustees should be aware of the charges which apply to your scheme.

One of the most significant benefits of saving for a pension is that you will get tax relief on your contributions that you would not get from other forms of savings and a certain amount of tax-free cash when you retire (although your regular income will be taxed).

Personal Retirement Savings Account (PRSA) is a more flexible type of personal pension. If you are self-employed, a home-maker or carer or unemployed you can take out a PRSA with a provider (and claim tax relief yourself). If you’re employed but access to the employer pension plan is restricted your employer must provide access to a PRSA. You get tax relief at source if you go through your employer’s designated PRSA provider. The employer can contribute but they do not have to. Like defined contribution pensions and personal pension plans the value of your pension depends on the amount you have paid in plus any growth, minus charges. PRSAs have capped charges. Non-standard PRSAs generally have higher charges than standard PRSAs. Charges are not capped.

Personal pension plans are suitable for people who are earning an income but not contributing to an employer pension scheme or the self-employed in a trade or profession. You have to set up your own contributions and claim tax relief each year. Usually you have to set this up yourself, pay your own contributions and claim your own tax relief. Employers usually don’t contribute. Like PRSAs the value of your pension on retirement is not defined and depends on the contributions built up plus any growth minus charges. There is no limit on charges for personal pension plans. They are generally higher than those on standard PRSAs.