We are all living longer lives, and can look forward to a long and happy retirement. It is vital to ensure that you have sufficient income to enable you to enjoy your golden years. The reality is however, that the majority of us will need to save a significant amount just to maintain our existing standard of living in retirement. This means thinking about your pension and saving the right amount into it from an early age.
Retirement income will typically come from a variety of sources including the state pension, personal or company pensions, savings, and possibly rental income.
What is a Pension?
A pension is a long term savings plan, where regular amounts and / or once-off lump sums are built up into a fund for retirement. The amounts saved are called contributions and these grow tax free within your pension fund to help provide additional income, when you retire.
You can have complete control over how your pension is invested and you can take risks that are appropriate to your individual circumstances, ranging from deposit accounts to geared property funds. There is a wide range of pension investment funds available to cater for all risk profiles. At MDL Financial Consultants Ltd, we pride ourselves on explaining the risks and potential returns of all asset classes and ensuring you understand the investment choices that you make, and that they are suitable for your needs. We regularly review your pension fund and will advise you of any changes that you should make along your pension journey.
It’s important that you take the time to calculate how much you realistically need to save to fund a 25 or 30 year retirement. The earlier you start a pension plan, the more time the fund has to accumulate and the better off you will be in retirement.
How much should I be saving?
Generally, you should be saving about half your age as a percentage of your income. In other words if you’re 30 years old, you should be saving 15% of your annual income. For someone earning €40,000 that’s about €500 per month but could actually only cost you €300 per month after tax relief, if you are paying tax at the higher rate of 40%.
Ask yourself what percentage of your current salary you would need to live on comfortably in retirement? It is even more important now to provide for your retirement, considering that the age from which the State Pension becomes payable is increasing over the next few years.
You may be approaching retirement but have not yet set aside some savings to provide you with an income when you retire.
The good news is that it is never too late to start saving for your retirement. There are generous tax reliefs available for pension funding, that you can take advantage of now. If you are paying tax at the higher rate you should consider maximising your pension contributions to help you provide for a more comfortable lifestyle in retirement. If you are in your 40’s or 50’s when you begin saving into your pension plan, you will naturally have more ground to make up, so you should commit yourself to saving a higher percentage of your salary.
What type of Pension should I have?
The main types of pensions are Personal Pensions, Personal Retirement Savings Plans (PRSAs), Occupational Pension Schemes, Public Sector Pensions and Buy Out Bonds.
Members of an occupational pension scheme and public sector employees can also make Additional Voluntary Contributions (AVCs). These AVCs can be made to the employer scheme, or independently to their own arrangement known as PRSA AVCs.
Company directors can also set up an Executive Pension Plan, which is similar in nature to an Occupational Pension Scheme, in that the company usually contributes on behalf of the director.