Everything You Need to Know About Private Pensions
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If you are considering starting a private pension or have just begun and are seeking more information, Alan McCarthy, a financial advisor, answers many of the questions beginners usually have.
Starting a pension plan is one of the smartest decisions you can make. It could help ensure a brighter, better future. Today, the State Contributory Pension is worth about €277 a week. While the State pension is helpful, will it be enough to provide a comfortable retirement?
What Are Private Pensions? Private pensions are set up by individuals in non-pensionable employment or by those who are self-employed. They provide an income in retirement and can be in the form of a Personal Pension or a PRSA (Personal Retirement Savings Account). Both qualify for the same tax relief and offer similar options at retirement.
Are Private Pensions Worth It? Yes, without a private pension, you can expect to have an income in retirement that relies solely on the State pension, currently €14,419 per annum. This represents a significant income drop for most people.
Why Are There Tax Benefits for Contributing to a Private Pension? Tax relief is the greatest advantage of saving in a pension. Unlike a savings account, contributions to a pension plan qualify for tax relief at your marginal rate of income tax (20% or 40%). There is an income cap of €115,000, and age-related limits apply for contributions. The fund is also allowed to grow gross of tax.
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What’s the Difference Between a Personal Pension and PRSA? There is very little difference. Both are individual plans available to people in non-pensionable employment, self-employed individuals, or directors. PRSAs have a limited range of funds, whereas personal pensions can usually access all funds provided by the pension provider. Personal pensions may have a lower charging structure, while PRSAs are more flexible, with capped charges and no exit penalties or charges for transferring to another provider.
Can I Withdraw Money from a Private Pension Fund? A private pension is usually only accessible from age 60 onwards, with no requirement to cease working. Early access might be possible under certain circumstances, such as ill health.
At What Age Can I Withdraw a Private Pension? You can withdraw your pension from age 60 onwards.
What Happens When I Retire? You can take 25% of the accumulated fund as a lump sum tax-free up to €200,000. Amounts between €200,000 and €500,000 are taxed at 20%. With the balance, you can buy an annuity (income for life) or reinvest in a post-retirement fund called an ARF (Approved Retirement Fund).
What Happens to My Pension Fund If I Die? The full value of a personal pension is paid to your estate tax-free.
Do I Need a Private Pension? If you are content with the State pension as your only retirement income, that’s fine. However, for most people, the State pension alone will not be sufficient to maintain their current lifestyle and enjoy an active retirement. A private pension is essential to bridge the gap between the State pension and your employment income.
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Is a Private Pension Better Than a Savings Plan for Long-Term Savings? Yes, due to the tax relief available on contributions and tax-free growth in the fund.
How Are Private Pensions Taxed in Ireland? The initial lump sum is tax-free, based on the limits mentioned earlier. The income drawn from the post-retirement product (ARF or Annuity) is subject to income tax at your marginal rate.
Are Pension Funds Protected? Most pension funds are invested in equities, bonds, and other asset classes, and their value will fluctuate with the markets.
How Can I Set Up a Personal Pension? Sound advice is invaluable, so it’s a good idea to seek guidance from a financial broker or advisor who can help you select the right pension plan for your circumstances.
For trusted advice, contact Alan McCarthy at alan.mccarthy@mbcfinancial.ie.
Your retirement may seem distant, but the truth is, the sooner you start planning for it, the brighter your future will be. How much you save depends on when you want to retire, the lifestyle you desire in retirement, and how much you can afford to save.