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You should start providing for your pension immediately. The longer you leave it the more it will cost – it’s as simple as that. The longer you have been investing into your pension fund the more money you will have at retirement, allowing you to maintain your standard of living and enjoy the rewards of working for so many years. You will need to look at your current outgoings to see what you can afford to put away and review regularly as your circumstances change.
You are entitled to income tax relief on your contributions into a pension. This means that the government will not tax money being paid into a pension plan so long as it does not cross certain limits. The growth you make on your money while it is invested is also tax‐free. Knowing you are providing for your future will also give you peace of mind.
There is no legal obligation on an employer to set up a pension arrangement for its employees. If a plan is in place each employer’s arrangement will have its own unique eligibility rules setting out who can join, when they can join and the benefits available to them. In the past many employer sponsored arrangements only catered for full-time employees. However, following part-time worker legislation in 2001 this is generally no longer the case.
All employers are required to have entered a contract with a PRSA provider so that access to at least one Standard PRSA is available for all “excluded employees”.
Membership of an employer sponsored arrangement ceases when you leave that employment. If you have more than two years Qualifying Service, which normally means two years in the scheme as a member for pension purposes, you will be able to:
- Leave your benefit in the plan until you retire (known as a deferred or preserved benefit),
- Move or transfer the value of your pension benefits to another pension arrangement.
Assuming your pension scheme is an Occupational Pension Scheme you have the following options.
- Leave it in the existing scheme, where it will continue to be invested, and then draw your benefits at retirement. You will need to contact the scheme trustees when you want to retire
- Transfer it to another Occupational Pension Scheme if you are/become a member of another one.
- Transfer to a Personal Retirement Bond (“Buy Out Bond”) or PRSA with a provider of your choice. You choose the provider and the investment strategy and have control over the investment of the pension thereafter.
The assets of your pension scheme are totally separate from the assets of the employer company and completely safe. In most cases, if a company goes into liquidation, the company’s pension scheme will be wound up. The trustees of the pension scheme are responsible for winding up the scheme, according to the rules of the scheme and current law. You have a number of options that are similar to those available to you if you leave the employer but they do depend on the terms of the scheme winding up.
Members are often asked to contribute toward the cost of their employer’s pension scheme. Contributions tend to be set as a percentage of salary. In a defined contribution plan the employer’s contribution is set out in the plan’s documents. In a defined benefit plan the employer normally pays contributions at the level needed to fund the benefits promised.
Your contributions to an employer’s pension scheme will normally be paid through payroll. As a result you will receive immediate and automatic tax relief together with relief from PRSI and the health levies. You do not have to claim this relief. The maximum contribution rate (as a percentage of total pay) on which you can receive tax relief is:
Highest Age at any time during the tax year Rate *
during the tax year
|40 – 49||25%|
|50 – 54||30%|
|55 – 59||35%|
|60 and over||40%|
*For tax relief purposes these contributions are limited to earnings up to a maximum of €115,000 in any tax year.
AVCs are contributions that a member makes to increase retirement benefits. AVCs are only permitted if the rules of the particular scheme permit AVCs to be made. If the rules do not permit AVCs to be made then a member has the right to pay AVCs to a Personal Savings Retirement Account (PRSA). AVCs qualify for tax relief at the highest rate of tax, you can actually reduce your income tax payments now, while you avail of a good investment opportunity. In addition any investment returns recorded are also tax free. In summary, you pay less tax now, and enhance your financial security for your retirement.
A PRSA is an investment vehicle used for long term retirement provision by employees, self employed, homemakers, carers, unemployed, or any other category of person. a contract between an individual and an authorised PRSA provider in the form of an investment account. There are two types of PRSA – a Standard PRSA and a non-Standard PRSA.
Most employer sponsored pension schemes in the private sector permit members to retire early with the employer’s and/or trustees’ consent from age 50 onwards. Many schemes allow members to retire due to ill-health at any age.
Once you get approval from the Revenue Commissioners, your employer and the trustees of the scheme you can retire early on the grounds of ill health and take your pension benefits immediately. Your pension may be lower as your contributions have ceased at an earlier age and the pension will have to last longer as you will be retiring early.
You will get the State Pension (Contributory) from age 66 as well as other pensions you have built up you retire, provided you have made the required number of PRSI contributions throughout your working life.
The value of your pension at that time will be paid to your dependants should you die before retirement.
Currently you are entitled to tax a substantial part of your pension fund as a tax free lump sum. You will have a number of options as to how you can use the rest of your pension fund, and the tax treatment will vary depending on which one you choose.
Once you have been a member of your employer’s pension scheme for more than two years you cannot take money out of the scheme before you reach retirement age unless you have to retire early because of ill health. If you leave your employer you can transfer your entitlement to another approved employer pension scheme or to arrangement in your own name.
At HC Financial we would recommend an annual financial review especially as we have witnessed recently a very changeable economic climate. Also as life is continuously changing and individual circumstances change it is best to ensure you are prepared for any unexpected events and have peace of mind and security for your future.