Many individuals can experience a significant drop in income when they cease working and retire. The State pension may help but is unlikely to be of a level that would replace working income. Saving regularly into a pension policy during your working life can help close this gap and ensure you can continue to have the same standard of living in retirement. It is important to check your pension policy regularly to ensure that it is performing in line with your expectations. You should take independent financial advice when you are retiring so that you take the right option for you.
Tax relief is available on contributions made to pensions up to certain limits and the investment growth within the pension is tax-free. When you retire, you are entitled to take a portion of the pension as a lump sum and take an income from the pension – this will be taxed as normal income.
Pensions can be provided directly to the customer (Personal Pension Plans) or through an employer (Occupational Pension Plans).
Occupational Pension schemes are set up by an employer and the benefits can be based on your service and salary (defined benefit pension) or on the fund accumulated before retirement (defined contribution pension) which will depend on the amount invested and the return on investments.
You can ‘top up’ your pensions fund through Additional Voluntary Contributions (AVCs) which are extra savings you can decide to make to increase your retirement benefits under an occupational pension scheme.
There are two kinds of personal pension plan: Personal Retirement Savings Accounts (PRSA) and Retirement Annuity Contracts (RAC).
· Personal Retirement Savings Accounts (also called ‘defined contribution’ pensions) must be taken out with an authorised PRSA provider which includes many insurers. The pension must meet certain requirements laid down in legislation. In particular, the charges must not exceed a certain level. Anyone under the age of 75 may take out a PRSA.
· A Retirement Annuity Contract is a personal pension which is an insurance contract approved by the Revenue Commissioners. RACs are generally taken out by the self-employed and employees who do not have access to an employer’s pension scheme.
These pensions are often called ‘defined contribution’ pensions due to the fact that the value at retirement depends on the level of contributions paid and the investment return.
When the time comes to access your pension fund, you can take up to 25% of the fund as a tax free lump sum. The remaining 75% is transferred to a new policy from which you will be paid an income. These policies can take three main forms:
· An annuity is a policy which will pay an income to the policyholder until death, regardless of how many years that will be. There is no associated surrender value with this type of policy.
· An Approved Retirement Fund (ARF) is a lump sum investment to which certain retirement benefits can be transferred at retirement. The money is invested with a qualified fund manager and a range of investment options is available. This means that the pension can continue to be invested while you take an income.
· An Approved Minimum Retirement Fund (AMRF) is similar to an ARF but cannot be withdrawn until age 75. There are detailed Revenue qualifying rules around the availability of ARFs and AMRFs.
Relevant resources/publications for further information
Women and Retirement in a post Covid-19 world