Pensions Made Simple
Why take out a pension ?
The state pension is equal to about one third of the national average wage, and is designed to cover only your basic living requirements, not replace your income. To save the money you need for a secure and comfortable retirement, you have to take matters into your own hands. You need to put money aside now for the time when you stop working.
- Pensions made simple
- The taxman gives you a hand
- What's my next step ?
- When can I retire ?
- Personal pensions
- Company pensions
- Additional Voluntary Contribution pension
- Buy Out Bonds
- What are my Options ?
- Tax Free Cash
- Taxed Cash
- Simplifying the Jargon
- Summary of Retirement options
Pensions made simple
There are just a few simple steps to get you from where you are now to living on a decent income when you retire.
- You find out whether you qualify for a pension plan.
- You save while you work. You can save regularly up to the maximum amount allowed by the Revenue Commisioners.
- Your savings are invested in a pension fund. The more you pay into your pension fund, and the faster it grows, the more income you get when you retire.
- You regularly review your pension fund to make sure you're on track. As time goes by, you may have to change the amount you are paying to reach your goals.
- When you retire, you will have a range of options availible to provide you with an income. You don't need to worry about which option is best for you now - you can decide when you retire.
The taxman gives you a hand
To encourage you to get started on saving for your own retirement, the government has given generous tax breaks on pension plans.
- You can claim tax relief on the money you pay into your pension fund. If you pay tax at the top rate, you save 40 Cent for every € you put into your pension fund.
- With most investments, the taxman usually takes some of the growth you make, but not with a pension fund - the growth is tax free. This allows your pension fund contributions to grow at a much faster rate than deposits into a savings plan, for example, where you pay tax on any interest or growth at a rate of 24%.
- When you retire you can also take part of your pension fund as a tax free lump sum.
What's my next step ?
This is a very important decision that will influence your lifestyle in retirement. You should talk to us and find out when your pension plan matures and the current and projected value of your pension fund. We can request values on your behalf. You should discuss you retirement options based on your fund size and your retirement needs.
When can I retire ?
The answer to this question depends on the type of pension you have.
If you took out a pension when you were self-employed or were working for a company which did not contribute to your pension, you probably have a personal pension.
If you were working for a company and joined a pension to which your employer was contributing, you probably have a company pension.
If you decided to top up your company pension with extra voluntary premiums you probably have an additional voluntary contribution (AVC) pension.
If you left an employer and transferred your pension fund to a stand alone pension, you probably have a buy out bond.
You can retire from a personal pension at any time between age 60 and 70.
You may be able to retire early, for reasons of serious ill health. The revenue Commissioners may allow retirement before the age of 60, if you are permanently unable to work.
People in some occupations are allowed to retire early, without having to be in ill-health. These are mostly sporting occupations, such as jockeys, cyclists and footballers.
Your normal retirement age is generally set by your company, and can be between 60 and 70. From age 50, you can take early retirement if your employer and the trustees of your pension agree.
You can also retire early if you are seriously ill. The Revenue Commissioners and Trustees can allow retirement at any age if you are permanently unable to work.
Additional Voluntary Contribution pension
Since your additional voluntary contributions are linked to your company pension, you must retire from both at the same time.
Buy Out Bonds
Your normal retirement age is set in your company pension, and does not change when you transfer to a buy out bond. It can be between 60 and 70.
You can choose to retire early from the age of 50. You could also retire early if you were seriously ill, and the Revenue Commissioners give their permission. more...
What are my Options ?
You will have a number of options at retirement and, within certain revenue rules, you can combine options in whatever way suits you.
The number of options available to you at retirement depends on the type of pension you have and whether you are a director with more than a 5% shareholding in the company from which you are retiring.
The four main options at retirement vary, but are broadly:
- Take a tax free cash lump sum.
- Buy an annuity.
- Invest in a approved retirement fund or approved minimum retirement fund.
- Take a taxed cash lump sum.
Tax Free Cash
Am I eligible to take tax free cash?
Yes. Everyone has the option of taking tax free cash at retirement. Although you do not have to take tax free cash, most people take the maximum amount allowed as this is more tax effective than the other options.
How much can I have tax free?
This depends on who you are and what kind of pension you have. There are two different maximum levels which apply. Some people can choose between them but others are limited to one or the other.
25% of the fund
If you have a personal pension or you have a company pension or AVC and more than a 5% shareholding you can take 25% of you retirement fund tax free.
Your options at retirement on a buy out bond depend on whether you qualified as a director with more than a 5% shareholding in the company before you left the company and transferred your pension fund.
If you are a director with more than a 5% share in the company and you choose to take one and a half times salary as tax free cash, your options on how you use the balance of the fund are limited to buying an annuity.
Advantages of taking maximum tax free cash
- Any other option would require the money to be taxed at some stage.
- Very tax efficient.
- Gives you the opportunity to buy something you've always wanted, or to clear a debt like your mortgage.
Disadvantages of tax free cash
- The fund that's left will provide less of a retierment income for you.
After you take your tax free cash you can use the balance of your fund to buy an annuity. An annuity provides you with a guaranteed income for the rest of your life.
When you buy an annuity you will have several options including:
- A guarantee of payment for up to 10 years. This means that if you die before the 10 years has passed, the pension will continue to be paid to your next of kin for the outstanding period.
- Increasing your pension each year to take account of inflation.
- Adding a dependants pension so that if you die before your dependants, then they will receive a pension for life.
The options you choose to include will affect the amount of pension your fund can provide. You may use your fund to buy an annuity from any insurance company you choose.
If you have a company pension and you are not a director with more than a 5% shareholding in the company, buying an annuity is the option you have after you take your tax free cash.
If you have a personal pension, an additional voluntary contribution pension, or you have a company pension and you are a director with more than a 5% shareholding in the company, you have additional options. You can choose to buy an annuity with all or some of your fund, but you also have the option of investing in approved retirement fund or of taking taxed cash.
What happens to my annuity when I die?
When you die your income stops unless you have bought an annuity with a guaranteed payment period or a dependant's pension.
If I choose an annuity now can I switch to an ARF later?
No, once you buy an annuity you no longer have access to you fund. It has been paid to an insurance company in return for a guaranteed income for the rest of your life.
How is an annuity taxed?
The income that you get from your annuity will be taxed as income for the rest of your life.
Advantages of an annuity
- Your income is guaranteed for the rest or your life.
- Your income will not vary with changes in stock markets.
- You can build in a pension for your spouse or your dependants so that they have a guaranteed income if you die.
Disadvantages of an annuity
- When you die your income stops. Unless you have bought a guaranteed payment period or dependant's pension, there is nothing to pass on the dependants.
- Once you buy an annuity you cannot change your mind. With most annuities, the options you have chosen and your level of income are fixed and cannot be changed.
If your retirement fund will provide your only or main source of income after you retire, you should consider investing some or all of it in an annuity to secure an income for the rest or your life.
After you take your tax free cash, you can take all or part of the balance of your fund as cash and pay tax on it.
Before you withdraw this cash, you must either have bought an AMRF, or be able to prove that you have guaranteed income of least €12,500 a year for the rest of your life.
Any money that you withdraw in this way will be taxed as income at your marginal (higher) income tax rate.
Advantages of taxed cash
- Gives you quick access to a cash lump sum.
Disadvantages of taxed cash
- Unless you have sufficient income from anther soure, you could run out of money.
Simplifying the Jargon
- Non-pensionable employment.
A job where your employer is not providing you with a company pension plan.
- Schedule E income.
Any income from employment.(PAYE)
- Schedule D income part 1&2.
Any income from a trade or profession. Generally applies to someone who is self employed or working as a sole trader.
- Net relevant earnings (NRE).
NRE is a definition of income used for tax purposes. It broadly means earnings from trades, professions and non-pensionable employment less any capital allowances ,losses and charges such as mortgage interest.
- Paid up.
If you stop making regular premium payments to your plan it is made paid up.
- Premium protection cover.
Pays your pension premiums if you become disabled and unable to work.
- Income protection cover.
Pays part of your income if you become disabled and unable to work.
An annuity is a life assurance product which pays you a guaranteed income for the rest of your life when you retire.
Summary of Retirement options
If you are a director with more than a 5% shareholding in the company and you choose to take one and a half times salary as tax free cash, the balance of your company pension fund must be used to buy an annuity. You can still choose any of the options for your AVC fund.
The tax free cash available from a company pension and AVC is limited to an overall maximum of 1.5 times salary.