Pensions

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Page Author: Christina Kearney QFA RPA

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Pensions for retirement planning

Pensions in Ireland are unfortunately over-complicated. Retirement planning can be very beneficial when done correctly, but there can be pitfalls. We strongly recommend that you get financial advice from a regulated expert prior to making any actual changes to your pension arrangements. Ethico are expert financial and retirement specialists and we are happy to help if you make contact.

There are various types of pensions that will suit different people at various points in their career and beyond. It is not a one size fits all approach. Here are some basic examples to give an idea of the complexity:

PRSA (Personal Retirement Savings Account): usually for people with no access to a group pension scheme with their employer.

PSRA AVC (Additional Voluntary Contribution): often used by members of occupational pension schemes who wish to make additional contributions outside the boundaries of the main scheme. AVCs are popular with Public Sector employees.

Personal Pension: used by the self-employed or people in non-pensionable employment.

Executive Pension: Pensions that are partly or completely paid by the employer on behalf on their employee.

Directors Pension: Similar to executive pensions however with more flexibility on contributions and retirement options.

Buy out bond: Used by employees who leave a company pension scheme and wish to "bring their pension with them". Note: they can usually choose to leave the funds in the old scheme if they wish.

ARFs & AMRFs (Approved Minimum Retirement Fund): A post-retirement option to warehouse your pension savings and to take a variable income from through retirement.

Annuities: Guaranteed Income for Life in retirement purchased with the pension savings were built up during your career.

So in simple terms, it's complicated. A good financial advisor will create a plan to suit your needs and recommend the right pension policy for you to keep you inside the rules and regulations.

Why do people do pensions?

A few simple points:

State pension will likely not be enough to live on for most people when they reach retirement age. Given the choice most people would like to have saved more to supplement their state benefits.

Tax relief is usually available on pension contributions. Limits and restrictions do apply, but 20% to 40% of the net cost of saving could be covered by getting tax relief. Pensions are one of the very few savings mechanisms with this incentive.

Long term growth can have a dramatic impact on your savings values if you make risk appropriate choices through your career. The €100 you save on your last day of work before retirement does not have any time to grow. The €100 you save on your first day could be worth €700, 30 years later. Compound interest over a long period of pension saving is a valuable concept to get comfortable with.

While pensions can be beneficial when set up and calibrated correctly, there are still many occasions where your Ethico advisors will advise you not to contribute to a pension. This may sound odd, but it is an important aspect to be aware of.

Get good advice and get moving!

More context:

Planning for retirement can be a complex and overwhelming task, with numerous factors to consider and an ever-changing landscape of financial products and services. In Ireland, there are several pension options available to cater to the diverse needs of various clients. This article aims to provide a comprehensive understanding of the types of pensions available in Ireland, along with their post-retirement options. We will also present fictional examples to illustrate the pros and cons of each pension type, helping you make informed decisions for your golden years.

State Pension (Contributory)

The State Pension (Contributory) is a pension provided by the Irish government to individuals who have made enough social insurance (PRSI) contributions during their working life. The amount of pension received depends on the number of PRSI contributions made and the individual's age.

Example: Mary, a 66-year-old retiree, has worked for 40 years and made the required number of PRSI contributions. She is eligible for the full State Pension (Contributory), providing her with a stable income in her retirement years.

Pros:

Provides a guaranteed income for life.
Indexed to inflation, ensuring that pension payments maintain their value over time.

Cons:

Reliant on the individual's PRSI contribution history, potentially resulting in lower pensions for those with sporadic employment.

2. Personal Pension Plans

Personal Pension Plans are private pensions set up by individuals who do not have access to an employer-sponsored pension scheme or are self-employed. These plans are managed by pension providers or insurance companies, and the contributions made are invested in a range of assets to provide income during retirement.

Example: John, a 45-year-old freelance graphic designer, sets up a Personal Pension Plan to save for his retirement. He chooses a plan with a diverse portfolio, ensuring that his pension fund grows over time.

Pros:

Offers flexibility in investment choices and contribution amounts.
Tax relief on contributions, up to certain limits.

Cons:

Potentially higher fees compared to employer-sponsored pension schemes.
Investment risks associated with the performance of the pension fund.

3. Occupational Pension Schemes

Occupational Pension Schemes are set up by employers for their employees. They come in two main forms: Defined Benefit (DB) and Defined Contribution (DC) schemes.

a. Defined Benefit Schemes

Defined Benefit Schemes promise a specific income during retirement, calculated based on the employee's salary and years of service. These schemes are becoming less common due to their high costs for employers.

Example: Susan, a 60-year-old schoolteacher, is a member of a Defined Benefit Scheme. Upon retirement, she receives a pension based on her final salary and years of service, providing her with a stable and predictable income.

Pros:

Guaranteed income for life, based on the employee's salary and years of service.
Employer bears the investment risk.

Cons:

Less common and increasingly rare, especially in the private sector.
The financial health of the employer may affect the pension fund's ability to pay promised benefits.

b. Defined Contribution Schemes

Defined Contribution Schemes are more common and involve both the employee and employer contributing to a pension fund. The income during retirement depends on the performance of the investments within the fund.

Example: Liam, a 55-year-old engineer, is a member of a Defined Contribution Scheme. His retirement income will depend on the performance of his pension fund's investments.

Pros: