Retirement Planning Advice
Retirement Planning Advice Cork
How Pensions Work
Every month, over a number of years you can allocate some money from your wages into your retirement fund. You can start a pension at any age but the earlier the better. Your pension contributions are put into a fund and they are invested on your behalf. The aim of this is to grow your savings over time and beat the amount you’d make from leaving it in the bank at a very low or even negative interest rate. In the end what you want is to have enough money at retirement to live without financial worries for the rest of your life.
A pension or retirement plan is just a long term savings plan but you may get tax relief on these savings. The Government wants and encourages people to invest in a pension so they offer tax incentives to put this money away and leave it untouched.
Any gains from your pensions are also reinvested over months and years, depending of course on how your investment and the markets perform. Small amounts invested as early as possible can become large amounts by retirement age. You can invest in a pension at any age but to reach the amount you need for retirement you would have to invest larger amounts depending on how late you leave it.
Personal Pension Plan
Quite simply a Personal Pension Plan (PPP) is an extremely tax efficient to save for retirement. This structure is suitable for self employed people (sole traders or partners) and people who are in employment but have no pension provided by their employer.
At MBC Financial we can advise our clients on the eligibility and suitability of an PPP for certain individuals. We also provide ongoing advice on investment choice and funding capacity by keeping our clients up to date on changes in revenue rules and legislation that will affect them.
How a Personal Pension Plan works.
Once we set a realistic target and select the most suitable plan the client decides what they want to and can contribute. Currently there is full income tax relief available on pension contributions. However this may change in the future. The maximum amount a person can contribute is as follows
Investment Choice
Until recently pensions were simply invested in a “Managed Fund”. In most cases the beneficiary knew little of the actual investment and had no control over how his/her money was invested.
The options now include traditional managed funds, sector and geographic funds, term deposits, individual stocks and tracker bonds. At MBC Financial we work closely with our clients in helping them select the most suitable investment.
Target Amount
Once we establish your expectations for income in retirement we will work with you to set realistic goals. We will then put the most suitable plans in place to make these goals achievable.
Pensions with Previous Employer
If you have an old pension with a previous employer you have a number of options.
- Leave the pension with the previous employer. However, as Trustees, the former employer retains investment control over the scheme and is the point of contact for the administrator and fund manager.
- Transfer the fund to a Personal Retirement Savings Account (PRSA). This is a simple contract and additional contributions can be made to it. However the means by which you take your benefits may be restricted.
- Transfer the fund to a Buy Out Bond. This severs the tie with the former employer and give you complete investment control. Also there is no change in how you take you benefits at retirement.
- Transfer to a new employer sponsored scheme. This simply consolidates the old and the new schemes and does not compromise how you take your benefits.
There are several factors that will need to be taken into account before a recommendation is made.
These include
- Age
- Retirement Age
- Salary (current and previous)
- The nature of the old scheme
To decide on the best option for you please contact us for a consultation.
Executive Pension Plan
An Executive Pension Plan (EPP) is an extremely tax efficient way for an employer to provide retirement benefits to its owners and senior employees
How an EPP works
The employer decides the amount of contributions to be paid into the scheme. This can be increased through tax deductable Additional Voluntary Contributions (AVCs) by the scheme member.
Good for employee
The key benefit for the scheme member is that all payments into each pension plan are not taxable, although tax may be payable when drawing down the fund. However, with careful planning, this liability can be minimised.
Good for employer
Since payments into Executive Pension Plans are treated as expenses, they reduce profit and thereby reduce the corporation tax liability too. Of course, a good EPP is also an excellent way for the company to retain its best personnel.
More choice when it come to your investment
Until recently, most pensions were invested in a ‘Managed Fund’. This gave little control over how the investment was controlled. At MBC Financial, we work closely with our clients to help them select the most suitable investment vehicle from a range of options such as traditional managed funds, sector and geographic funds, term deposits, individual stocks and tracker bonds.
MBC Financial will be happy to advise on all aspects of an EPP scheme, including eligibility criteria upon request. We can also advise on your investment choice and funding capacity by keeping you up-to-date on changes in legislation and revenue rules.
Occupational Schemes
These are schemes that are set up by an employer for a group of employees. The employer effectively sponsors the scheme by making contributions for the employee who in turn can make contributions also.
There are two types of Occupational Schemes:
Defined Benefit Schemes / Final Salary Schemes
Also know as Final Salary schemes these promise to provide an income for life for a member depending on his/her final salary and years of service. For example if an employee had 30 years service and had a final salary of 40,000 the pension promise may be 1/60 of salary for every year. In this case the pension promise would be 30/60 x €40,000 = €20,000 per annum.
Defined Contribution Schemes
These are more common now as the cost of Defined Benefit scheme for employers has become almost prohibitive. Effectively the employees benefits depend entirely on the fund value and the pension that they can expect depends on prevailing annuity rates and whether or not they want to provide a pension for their spouse after they die.
In both these cases the Trustees of the scheme are obliged to provide you with an Annual Benefit Statement and a Statement of Reasonable Projection.
At MBC Financial we can work with employers and scheme members to ensure the scheme in place is efficient, transparent, cost effective and accessible.
To do this we provide investment advice on schemes, to both members and Trustees, as well as online access. A summary of the services we provide are:
- On-line access system – Pension Planet Interactive. Employer access and member access.
- Data download facility – Interfacing with the companies payroll provider for submitting pension contributions.
- Pension Pulse – Funding reports for members. Comprehensive member education.
- Lifestyling – Personal Lifestyle strategy – which takes care of members investment throughout the whole term of the policy.
- Biggest and best performing fund manager in the Irish market.
- Client services manager to attend annual trustee meeting.
- My Pension smart phone app available to members
Post Retirement
How you take your benefits depends on several factors.
These include:
What structure you used to accumulate your pension fund
- Fund Value
- Final Salary (if employed)
- Years of Service with employer
- Age
- Your income requirements
At MBC Financial we will look at the various choice facing you and make a recommendation on which will suit you and your family best.
The following is a list of options. Some or all of these may be open to you depending on the factors outlined above.
Annuity
This is where you purchase an income for life from an insurance company. You are guaranteed a set income that can be level of index linked. Once entered into the annuity cannot be altered and you will have no access to your capital. The older you are the better the annuity rate will typically be.
Approved Retirement Fund (ARF)
This is an alternative to an annuity where you can withdraw funds as required. You retain full investment control. However the main risk here is “bomb out” whereby you use all your fund so that later on in life there is no additional income available. If you want to avail of an ARF you must have a guaranteed income for life of at least €12,700. Alternatively you must have at least €63,500 in an Approved Minimum Retirement Fund.
Approved Minimum Retirement Fund (AMRF)
This is in place to ensure bomb out on your entire fund does not occur. You may only access the capital at age 75. The interest/growth may be accessed in the mean time however.
Tax Free Lump Sum
This can be taken in two forms. Salary Dependent: The tax free lump sum is a maximum of 1.5 times salary. This is only open to employees. Fund Dependant: The tax free lump sum is a maximum is 25% of your fund and is capped at €200,000
Depending on your fund value, employment status and the source of your pension you may have access to all or a combination of the above structures. The important point to note is that you only make your decision on how you draw your benefits when you retire. In the mean time it is important to build a meaningful fund to give yourself these options.
Retirement Planning Questions and Answers
Why is retirement planning so important?
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
What are the steps in retirement planning?
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.
When should you start planning for retirement?
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.
How can I avoid taxes when saving for retirement?
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.
So how do you draw down assets in retirement?
Or how do you draw down your pension pot once you retire?
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.
What can I do with my remaining pension fund?
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.
Where should I put my retirement money?
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.
So you say you retire at 65, you’ve got your €200,000 you take the 25% but then you have to plan for 20 years on that €150,000
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.
How much money should you have when you retire?
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
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