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Retirement planning is important because what retirement planning allows you to do is to replace either a portion or most of your salary when you retire. As an example, you’re used to earning a set salary over a given time while you’re working. And then you retire on a Friday and on the Monday you no longer have an income. Retirement plans can be put in place to replace the majority or part of your income when you retire, so that your lifestyle doesn’t suffer from a financial point of view
A first step in terms of retirement planning would be to set out your retirement goals. And it’s also down to affordability. When we meet a client for retirement planning, we would assess if they have any experience in retirement planning, if they have existing pension pots, and if they’re managed and how they’re looked after. We would then set a goal for a client with regard to saving money for retirement. This is all on an individual basis and based on affordability. There’s tax relief on retirement planning so if someone is on a 20% tax bracket, they get 20% tax relief 40% 40% tax relief. It’s really about putting a plan in place as to what the client wants from it. We view a pension as being a long term savings plan. The earlier you start it, the more you’re going to have when you retire. One question we would be asked is how much should I put into my pension? That is a very individual question because it’s all based on a particular individual circumstances.
As early as possible because it is like a long term savings plan. The longer you’re paying into it, the more money you pay into it, the more money you’ll have at the end.
The most tax efficient way of saving for retirement is through your pension because you will get tax relief at your marginal tax rate on any contribution that you’re putting into it, subject to revenue limits.
It depends on the type of pension you have. There are two types of pension: defined benefit and defined contribution. 90-95% of people would have a defined contribution. This is based on the value of your fund at retirement. An example: if we were to take someone with 200,000 in a pension fund at retirement, they could take out 25% of the value of the fund as a tax free lump sum, which is €50,000. Then with the remaining €150,000 they have two options: They can either ) buy a pension, which is called an annuity, or B) they can invest that money in an approved retirement fund /minimum retirement fund. They’re like post retirement pension pots and then you draw an income from that as you see fit.
Option 1 is to buy a pension which we call an annuity. You can then buy a pension that will give you a guaranteed income every week or every month or every year, as long as you live. Or option 2 would be to put it into an approved retirement fund / minimum retirement fund. They’re just post retirement pots and then you can draw money from that as you see fit. However, any money that you take from the annuity and The approved retirement funds they’re all subject to income tax USC and prsi.
This is a very individual question so if it’s a case that a person has chosen to buy an annuity with it, then that’s outside your control, they’re going to get paid indefinitely. There’s no investment piece with regard to that. If it’s a case that they have gone with approved retirement fund/ retirement funds, where that money goes is really determined by the client’s attitude to Investment and capacity for loss, and also their return that they want from the money and how long or how much they want to take from it.
We would have low risk funds, medium risk funds and high risk funds to suit individual people. Then it depends on how much money somebody wants to take from that on the annual basis. We have sometimes what’s called the bomb out risk where for example, if you have €150,000 left, and someone decides to take €50,000 a year from it, it’s going to be gone in three years time. So they’ve got to manage how much money they take out and how often so that pot doesn’t empty.
You try to make it last as long as you can. That’s why there is a lot of management and it needs to go into the right Funds for that particular individual. Some people when they retire won’t actually access that approved retirement fund straightaway because they may be entitled to the state pension. So they’ve got that other income coming from the State but a lot of them because they’ve been used to earning more money before they retire, will supplement their income by withdrawing money from the approved retirement fund on top of the old age state pension.
It’s based on your current lifestyle and your future lifestyle, what are the assets that you have, whether you have savings, cash, whether you’ve rental property that you’ve income coming from. In the ideal scenario, what people try and do is you will try and fund for maybe 50% to 60% of your income pre retirement, to have that in post retirement, but again, it really depends on somebody’s lifestyle
Financial Planning Standards Board
Certified Financial Planner