Planning for retirement may be a priority for you if you are aged 55 to 65, or perhaps it seems like a distant prospect. However, proactive planning during these crucial years could greatly benefit your pension fund.
Here are six things to consider:
1. Evaluate your position
Royal London Ireland’s pension proposition lead, Mark Reilly, suggests that the initial stage should be to assess your current state, taking into account any benefits accrued from existing pension funds. The majority of individuals now hold various pension products, deviating from the ‘job for life’ notion. Reilly warns against the chaotic rush of locating old pensions at the age of 65.
Once you’ve identified your pensions, you may consider merging some. While this could be beneficial, it is not always the case. Trevor Booth, the head of retail sales with Mercer, recommends delaying some pensions as long as feasible, allowing your pension to grow if there’s no immediate need to access it.
Certain occupational pensions can be deferred, while others can’t, so it’s crucial to verify. Private pensions, such as a PRSA or personal retirement bond, can continue to grow until you reach 75.
You should also examine the contents of your pot and the income it will provide you when you retire.
2. Enhance your savings
By logging into your pension plan, you can easily find out how much income your pension is likely to provide in retirement. If it’s less than anticipated, don’t fret.
Booth acknowledges that the reality of the pension sum can be a hard pill to swallow. However, he notes, people often overestimate the income they would require in retirement. Furthermore, there is still time available to increase contributions.
Reilly suggests that we often adopt an ostrich mentality, refusing to face reality until it’s too late. However, he asserts that it’s never too late to start planning for retirement, even if you’re already 55. A financial shock can often be the wake-up call needed to realise the severity of the situation. Sticking your head in the sand won’t make the problem disappear, but being informed, at least provides an opportunity for action.
The first course of action is to exploit employer contributions to your pension. This means making the necessary payments into your pension to reap the maximum contribution from your employer. If, for example, your employer matches up to 8% of your salary in contributions, you should ideally be contributing that same percentage.
Once you reach 55, you’re permitted to contribute up to 35% of your income towards your pension fund, while also receiving tax benefits – provided your annual income doesn’t exceed €115,000. Reilly urges individuals to seize this opportunity.
Moreover, you should contemplate making Additional Voluntary Contributions (AVCs) according to your age. Upon reaching 55, you can again contribute up to 35% of your income, with tax relief on an income cap of €115,000 per annum. This percentage increases to 40% after the age of 60. For example, someonea earning €100,000 could contribute €40,000 when they are 60 or more, costing them only €24,000 after tax relief. If your income is €30,000, it’s possible to contribute €12,000 annually, costing you just €9,600 post-tax relief.
However, if you are close to reaching the standard fund benchmark of €2 million, it might be wise to halt your contributions. This only concerns a small percentage of savers though.
It’s also prudent to seek financial counselling at this juncture to navigate through retirement planning. Advice on how to utilise multiple pension pots can be crucial and you also need to ponder on the ideal retirement age for you.
From the start of this year, the populace have been given the luxury of delaying their state pension to any year between 67 and 70, a choice not available before, instead of the automatic allocation at 66 years of age. This choice allows an increased weekly pension, with the highest weekly rate reaching €290.30 at 67 years of age, and increasing further to €337.20 at the age of 70. This is notably higher than the current €277.30 rate for those who retire at 66.
Although having more choices is typically advantageous, adding further options for the state pension age can theoretically confuse a retiree’s decision-making process. However, the reality appears unchanged from the past.
Booth dismisses the idea that individuals are choosing to delay their pensions, stating “It’s an uncommon occurrence”. Among the reasons he highlights is the life span needed for it to be financially beneficial, as well as considerations around Pay Related Social Insurance (PRSI). This is due to the fact that if you continue to work and choose to delay your state pension, you would be subjected to PRSI on all your earnings. This was something that could have been avoided earlier. However, to avoid facing PRSI while working past the age of 66, you need to begin receiving your state pension.
“It’s almost always the case that those who choose to keep working start drawing down their state pension at 66,” Booth says. However, for those lacking in contributions for a state pension, delaying could make financial sense.
It would be advisable for you to evaluate your potential state pension entitlement. To be eligible for a full state pension, you are required to have made a certain level of social insurance contributions. The maximum current rate stands at €277.30 a week, or €14,419 annually, but depending on your contributions it could be as low as €138.70 weekly, equating to €7,212 a year. You can assess your entitlement by requesting a statement on mywelfare.ie. If you find out your entitlement is less than anticipated, it might be possible to supplement your contributions to ensure you receive a better rate.
Considering an alternative retirement fund or annuity? It’s definitely something to think about.
A vital aspect of retirement planning is deciding on how to utilise your private pension—if you have one—upon retirement. Those privileged with a defined benefit (DB) scheme receive a retirement income that is a fraction of their final salary, roughly half or two-thirds for those with full benefits, typically dispensed via an annuity. An important consideration for such pension savers as they approach retirement is whether to seek a transfer value or retain the pension, according to Booth.
Conversely, those associated with the prevalent defined contribution (DC) scheme are given a few choices. An annuity provides a fixed income, with rates having increased of late. For instance, an annuity rate of 5.06% is presently offered by Irish Life on a €300,000 fund for a 65-year-old man, resulting in an annual income of €15,120. Booth highlights that the number of people resorting to annuities has seen a surge in recent years as pensions can recover their principal capital precipitously than it would have been feasible two years ago. However, the drawback is that the annuity extinguishes when you pass away.
The alternate option is an Alternative Retirement Fund (ARF). This allows your pension fund to follow you post-retirement, after drawing your tax-free lump sum. Upon your death, the remaining balance of your ARF can be transferred tax-free to your spouse or children, though they may face tax complications. This allows for potential capital growth, whilst obliging a 4% annual drawdown, escalating to 5% once you turn 71. However, one must consider the risk of depleting the ARF due to unsound investment choices. According to Booth, the decision boils down to prioritising between certainty and adaptability.
Additionally, the consequence of selecting different pension products on your cash-free lump sum needs deliberation.
Lastly, after determining how you plan to utilise your retirement savings, it becomes necessary to scrutinize your pension investments, determining if they align with your objectives.
Booth mentions that numerous work-related plans provide lifestyle strategies, leading your savings to gradually align with your end target – that is an annuity or ARF. He asserts that should your final goal be an annuity, it will transition into investments that correspond with the annuity cost. He further explains that if you plan to strive towards an ARF, it’s likely you will maintain your investments in assets associated with risk, positioned in an intermediary risk fund at the instance of retirement.