If you are aged between 55 and 65, plans for retirement are possibly looming large – or maybe you still think it is something that will happen in the distant future.
Either way, taking control and planning carefully during these important years will likely have a positive impact on your pension fund.
Here’s six things to think about.
1: Work out where you’re at
“The first step is to review where you’re at”, says Mark Reilly, pension proposition lead with Royal London Ireland, suggesting you should look at any benefits you have built up across any pension funds you might have. Given the job for life is largely a thing of the past, people tend to have a variety of pension products these days.
“You don’t want to be 65 and scrambling around looking for old pensions,” says Reilly.
Once identified, you may choose to consolidate these. “It might be advantageous to consolidate some of them,” he says. But not always.
“The best thing with multiple pensions is to defer some of them as long as possible”, advises Trevor Booth, head of retail sales with Mercer, “it’s best to leave your pension growing. If you don’t have a reason to access it, you should be leaving it as long as you can.”
Some occupational pensions can be deferred – but some can’t, so it’s important to check. When it comes to private pensions, you can leave a PRSA or personal retirement bond grow until age 75, for example.
You also need to take a look at just what’s in your pot and what kind of an income this will give you in retirement.
2. Boost your savings
It’s easy to check how much of an income your pension is likely to provide in retirement by logging on to your pension plan. And if it doesn’t look as bountiful as you might have hoped, don’t despair.
“It can be almost hurtful to see the reality of what your pension will be,” says Booth. On the upside, he says, people can overestimate how much of an income they will need in retirement.
And there is still time to boost contributions.
“Sometimes the head in the sand mentality wins over, and you get to age 55 and you might think it’s too late. But it’s never too late,” says Reilly. “If you get a shock, maybe it’s the shock you need. If it’s not a pretty picture, at least now you’re informed. Keeping your head in the sand isn’t going to fix it either.”
First up is to ensure you’re maximising contributions from your employer; make sure, if you can afford it, to make a pension payment that will give you the highest contribution from your employer. So, if your employer offers 8 per cent of your salary if you also contribute 8 per cent, check if you are at this level.
“You should absolutely grab that with both hands,” says Reilly.
Secondly, consider your age, as making additional voluntary contributions (AVCs) is also an option.
Once you turn 55, you will be able to contribute 35 per cent of your salary and obtain tax relief – up to a maximum of €115,000 in earnings a year (so a maximum pension contribution of €46,000). This increases to 40 per cent once you turn 60. So, based on a salary of €100,000, you could contribute €40,000 if you are aged 60 or above and it will only cost you €24,000, based on tax relief at the higher rate. If you earn €30,000, you can contribute €12,000 a year, and it will cost you €9,600, due to relief at the standard rate.
If you’re approaching the standard fund threshold of €2 million, it may make sense to stop contributing. But this is only relevant for a small number of savers.
Getting financial advice at this point may also be important to determine how you can get to where you want to be when you retire, and what to do with the various pensions you may have.
3. Decide when you’ll retire
From January 1st of this year, people have had the option, for the first time, of deferring their State pension until any age between 67 and 70, rather than taking it automatically at the age of 66.
Doing so will give a greater pension on a weekly basis, as the weekly pension is paid at a maximum weekly rate of €290.30 from the age of 67, rising to €337.20 from the age of 70. This compares with a current rate of €277.30 for those retiring at the age of 66.
While choice is always a good thing, extending the State pension age can theoretically complicate a retiree’s decision process. In practice, however, it appears to be the same as it ever was.
“No” is Booth’s answer to the question of whether or not people are deferring their pensions.
“We’re not seeing it as a common theme”, he says, pointing to issues around the length of time you’d have to live to make it worthwhile, plus the impact of PRSI. This is because if you do opt to stay in the workforce and postpone drawing down your State pension, you will incur PRSI on any earnings – PRSI that you could have previously avoided. To avoid it while working over the age of 66, you need to be drawing down your State pension.
“Invariably, anyone we see staying on working is taking the (State) pension at 66,” says Booth. Deferring can make sense, however, for those who are short on contributions for a State pension.
4: Check your State pension entitlement
You should also check just how much of a State pension you will be entitled to. To qualify for a full State pension, you need to have a certain level of social insurance contributions.
As mentioned, the current maximum rate is €277.30 a week, or €14,419 a year but, depending on your level of contributions, it may be as low as €138.70 a week, or €7,212 a year.
You can check your entitlement by requesting a statement on mywelfare.ie. If you discover your entitlement is less than you had hoped, you may also be able to top up your contributions to ensure you get paid at a higher rate.
5: Alternative retirement fund or annuity?
A key part of preparing for retirement will be thinking about how you’re going to take your private pension – if you have one – when you retire.
If you’re one of the lucky few remaining with a defined benefit (DB) scheme, you will get a retirement income that is a proportion of your final salary – typically about a half, or two-thirds, for those with full benefits. This will be paid out through an annuity.
For such pension savers, the big decision when coming close to retirement will be whether or not to look for a transfer value, or keep the pension, says Booth.
For those with the now more common defined contribution (DC) scheme, there are a couple of options.
An annuity pays out a guaranteed income – and rates have increased lately. For example, Irish Life currently offers an annuity rate of 5.06 per cent on a fund of €300,000 for a man aged 65 – which works out as an income of €15,120 a year.
“The number of people going to annuities has doubled in the past year or so, because people are able to get their original capital back more quickly than they would have two years ago,” says Booth.
The downside is that when you die, your annuity dies with you.
The other option is an alternative retirement fund (ARF). This brings your pension fund with you into retirement, once you draw down your tax-free lump-sum. When you die, the balance of your ARF can be passed tax-free to your spouse, or to your children – although tax issues will arise for them. With such a structure, your capital can continue to grow – although you’re obliged to draw down 4 per cent a year, rising to 5 per cent annually once you turn 71.
The downside of course is the risk that poor investment decisions mean your ARF runs out of money. For Booth, the decision is “more about whether you want certainty or flexibility”.
And you will also need to consider the impact on your cash-free lump sum of the different pension products.
6: Review what you’re invested in
Once you have an idea of how you’re going to draw down your retirement, you should look at how your pension is invested – and whether it matches your intentions.
As Booth notes, many occupational schemes offer lifestyling approaches, whereby your savings transition over time so they match your end goal – ie annuity or ARF.
“If you’re going for an annuity, it will derisk into investments that are aligned with the cost of an annuity”, he says, adding that if you’re aiming for an ARF, you will probably stay invested in risk-based assets, and will be in a medium risk fund at the point of retirement.
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