How much do I need to invest in my Pensions?
As stated earlier, as much as you can. The government offers generous tax relief on your pensions contribution thankfully. Again, the rule of thumb is to invest a portion of your earnings equal to half your age but more if possible.
You can get tax relief on these contributions as follows:
|Age||Income Tax Relief (%)|
As pensions are designed specifically for retirement, they offer numerous advantages that other savings plans don’t.
- Your fund grows in a tax-efficient manner as no capital gains tax are applied to growth.
- The money you pay benefits from the levels of tax relief outline above.
- Your pension cannot be accessed until you’re at least 60 (unless you have a company pension, which may differ), meaning that no matter how tempted you get, you can’t dip into your fund. This is ideal as everybody occasionally has a moment of weakness.
When will you be eligible for the State Pension?
The age you can access your state pension is increasing to:
- 67 in 2021
- 68 in 2028
If you wish to retire earlier than this, you can do so if you have a sufficient private fund in place.
Checklist to Follow:
- Collate your Benefit Statements for your personal, company, PRSA and AVC pensions.
- Write to previous employers to track retained benefits.
- Check the performance of your pension investments.
- Is the asset allocation consistent with your term to expected retirement?
- Switch out of underperforming investments.
- Ensure your investments suit your appetite for risk.
- If you plan to take an annuity, consider a life styling option, which will reduce the risk in your pension funds as you get closer to retirement
- Gauge what your living costs might be when you retire.
- Compare your pension forecasts to how much your living costs will be in retirement.
- Consider consolidating your pensions to make it easier to manage your retirement savings. Before consolidating, check you’re not forfeiting any benefits or incurring any charges
- Write to the Department of Social & Family Protection to establish your entitlement to the state pension.
- If you can, increase your pension contributions to take advantage of the additional tax relief.
- Check whether your employer will match your company pension contributions if you increase them.
- Consider making additional lump sum contributions to your pension if you receive a bonus.
When you have all the information, you can then calculate your expected retirement fund. A calculator is available at www.pensionsboard.ie . This will give you a realistic expectation of the percentage of your current income you will have in retirement. You still have over 15 years to plan, so you have lots of time to increase the monthly investment amount to ensure you have adequate income in retirement.
What amount of investment risk are you willing to take?
You could invest in a Lifestyle Fund; this type of fund aims to change your asset allocation as you approach retirement. Each fund manager may however have a different approach to the de-risking process and asset allocation. Some will move to Gilts and Cash whilst others may use Alternative Asset Classes to help reduce risk and volatility. Check your funds to ensure you are de-risking as you approach retirement.