Five Ways to make pensions work for you

A pension is essentially a long term savings plan that’s locked away until you retire, with the added benefit of tax relief on the amount you save into it. Starting a pension may not be at the top of your priorities early in your career but the sooner you start to fund the lifestyle you require in retirement, the better chance you have of making it a reality.

1: You may need to fund up to 30 years of retirement

As a nation, we are living longer and with medical advances we are healthier than ever before. While this is positive news, from a financial wellbeing point of view people are not saving enough money to fund their potentially longer retirement. This is why the Government has been actively alerting people to the risks of having little or no pension provision. Having a personal pension makes it more likely that you will be able to maintain the standard of living you want. Something you may not be able to do on a State pension alone.

2: Drop in income when you retire

Without a pension in place, your personal income could drop by over 70% in retirement. Currently, the State Pension (contributory) is €12,911.60 (€248.30 a week), but the average wage is €41,695*. In order to avoid a big drop in income when you retire, you should consider taking some practical steps, today, to fund your retirement.

*Source CSO, Average earnings in Q1 2020, Earning and Labour Costs

3: Age you can retire is rising

The age of eligibility for the State Pension (contributory) is no longer 65. The current qualifying age for all state pensions is 66. If you want to retire before you are 66 and before you start receiving your State Pension, you can possibly do so if you have a private pension in place that can bridge the gap. You will need to review the qualifying eligibility with your own pension provider.

4. What if I don’t have a pension?

It’s never too late to start saving for your future. While time is a key ingredient to successful pension planning, thanks to generous tax relief on pension contributions, the amount of income that you can save into your personal pension and receive full tax relief on actually increases as you get older. Depending on your age, you can save up to 40% of your income (within Revenue maximum limits) into your personal pension to avail of the tax relief. So, even if you are starting your pension later in life, there is still time to catch up.

5. I have a pension – what should I know?

If you are fortunate enough to have a personal pension fund in place then there are a few things you should check on regularly.

1. Have you reviewed the value of your pension fund and checked if it’s on track to deliver the amount of money you will need to support your desired lifestyle in retirement? This should be done every year. You may have a number of pension pots from previous employments. While there may not be huge money in them individually, combined it may be a sizable amount towards the pot available to you when it does come to your retirement. In certain circumstances it may be a good decision to merge these into one pension plan that you control.

2. Have you maximised your contributions for tax relief? Remember, the maximum percentage of qualifying income that can be saved towards a pension is 40% where full tax relief is available. Some people often underestimate this figure. Others may not be aware that it is possible to top up pension contributions and receive the full tax relief within all of the relevant limits using an Additional Voluntary Contribution (AVC). Additional Voluntary Contributions (AVCs) are contributions you make to your employer pension scheme to build up an additional retirement fund. When you retire, this AVC fund can be used to top up your employer pension benefits, within Revenue limits. Some AVCs also offer the facility to add additional death in service benefits for dependants.

3. Review your pension fund performance and charges. Is your personal fund growing and invested in a suitable portfolio? You may have scope to change the way your personal pension fund is invested and getting advice on your investment strategy and fund performance is important to ensure continued growth. Also, as you draw closer to retirement age, it is important to balance the investment risk of your fund to ensure it’s is fully aligned to your financial goals. You should check and discuss all options with your financial adviser and pension provider.

  1. When we take out our pension plans, many of us do so with the longer term in mind and may be paying into a pension for 20+ years. Over time new investment funds become available and they may have features that are more in line with today’s market offering, e.g. Lower annual management charges.

4. Make sure you fully understand employer contributions. Many employers offer their employees various forms of pension benefits as part of generous employment packages. This generally includes pension contributions. However, it is not uncommon for employees to underestimate the true scale and benefits available to them. One example arises when there are ‘matching contributions’. You should talk with your HR or payroll department and meet with the pension provider to gain a full understanding of the maximum level of matched contributions that will be made available by your employer.

5. If you have changed employer in the past and have been paying into a scheme, then make sure you get advice on whether or not it is a good idea to switch your fund from your previous employer to the new one or whether you should leave it where it is until retirement. Sometimes you may lose out on benefits by switching your fund, so it is important to always check with your financial adviser before making any changes to your retirement fund.

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The information contained in this article has been prepared by Bank of Ireland (“BOI”) for information purposes only and is not meant as advice. BOI believes any information contained in the article to be accurate and correct at the time of publishing.