Now is the time to maximise your tax break and continue to build your retirement fund.
How much do I need to invest?
At sixty years of age you are on the verge of retirement, about six years from the average retirement time. Therefore, it is vital that you plan your investment strategy and have a realistic view of the value of your fund when you reach retirement age, usually any time after 60 years of age.
How much tax relief do I get on each contribution invested?
The taxman is willing to give a helping hand and will give you income tax relief at your marginal rate on up to 40% of your net relevant earnings. That is a very attractive incentive particularly if you are a higher rate tax payer which is 41%.
Let’s look at those figures for a high rate tax payer who contributes €10,000 to their pension fund. They will get tax relief of €4,100. The net cost is €5,900 (correct May 2013 and may be subject to change in tax rules). The calculation for a standard rate tax payer is a net cost of €8,000 for an investment of €10,000.0
Therefore, you should maximise your tax break opportunity in the years leading up to retirement.
Because pensions are designed specifically for retirement, they offer a number of advantages that other savings plans don’t.
- The money you pay in benefits from tax relief.
- Your money grows in a tax efficient way as no capital gains tax applied to growth.
We’ve based these details on our understanding of current taxation law and practice. They might be affected by any future changes in legislation.
When can I access State Pension?
The age for accessing the State Pension is increasing as follows:
- 1st January 2014 – State Pension age is 66
- 1st January 2021 – State Pension age is 67
Checklist – it important to collect all the relevant information.
- Request up-to-date statements for your personal and company pensions including your AVC’s.
- You may need to write to previous employers to enquire about retained pension benefits.
- Write to the Department of Family & Social Protection to establish your State pension entitlement.
- Gauge how much money you will require to support your retirement.
- Seek advice if there’s a significant shortfall as delaying or phasing retirement could be an option.
- De-risk your investments to protect your pension from downturns in the stock market. It is vital that you understand the amount of investment risk you are currently taking and the investment options available to you.
- Boost your pension by increasing your contributions and/or adding lump sum payments.
- Think about the tax-free payment you may be entitled to and whether you want to take your pension as an annuity or through income drawdown.
- If you want to take an annuity, decide which type. An annuity can, for example, increase by a set percentage, be linked to the rate of inflation or provide a spouse’s pension.
- Consider whether you want to take 25% of your pension pot as a tax-free lump sum – and think about how you might use this money and the choices available for the remainder of your fund. If you choose 25% of the fund then the balance is invested in an Approved Retirement Fund – subject to conditions.
- Write a Will or review any existing Will you have in place
- Check what will happen to your pension on death.
- Assess the value of your estate for inheritance tax purposes and consider ways to reduce your liability.
At Retirement –
Our business is to structure pensions to help you maximise your income in retirement.
Retirement is your time. It is the start of a new and exciting part of your life and you have the chance to enjoy the freedom it presents. You can control what you want to do and when you want to do it.
Until now, your investment goal was building a retirement portfolio that could provide adequate income in retirement. When you retire, you will need to make sure that you use this retirement fund wisely. You want to give yourself financial security, so that you can get on with enjoying a very fulfilling retirement. The most important decision you will have to make is what to do with your retirement fund.
At UFS, we provide a professional advisory service to help you understand the options that are now available to you.
These are just a sample of the questions you may have.
- Can I claim my retirement benefits before 65?
- How much is available tax free?
- How do I bring the various pension plans from previous employers together?
- If I have benefits outside Ireland perhaps the UK what happens this fund?
- Should I invest in an annuity and how do I make sure I get the best rate?
- What investment choices are available?
- Do I have to take my pension from the company I have previously saved with?
- What type of annuity should I have?
- Is an annuity or ARF a better option for me?
- What types of annuities are available?
Financially, this is a critical time in your life and you need to ensure you get the best advice. You need to consider all the pension investments you have accumulated during your working life and the most efficient way of taking these benefits.
Retirement is your time. It is the start of a new and exciting part of your life and you have the chance to enjoy the freedom it presents.
When you retire, you will need to make sure that you use this retirement fund wisely. You want to give yourself financial security, so that you can get on with enjoying a very fulfilling retirement.
The most important decision you will have to make is what to do with your retirement fund. When you retire, you can usually take a part of your pension fund as a retirement lump sum. You may be able to take some or all of this retirement lump sum tax-free. Then, if you meet certain conditions, you may be able to choose what you want to do with the rest of your fund.
- Use it to buy a pension for life (also known as an annuity, a regular income for the rest of your life);
- Re-invest it in an approved minimum retirement fund (AMRF) or approved retirement fund (ARF); or
- Take the rest of the fund as taxable cash – subject to conditions.
- In some cases, a combination of (a) and (b) above may used.
How much Tax-Free Cash can I access from my pension?
There are two possibilities regarding the lump sum calculation if you are a member of an occupational pension scheme.
- A maximum of 150% of your final salary (different salary calculation for proprietary director) and the balance of your fund is used to buy an annuity.
- 25% of the value of your fund and the balance is invested in an AMRF/ARF.
If you have a PRSA or Personal Pension then the maximum amount payable tax free is always 25% of the value of your fund.
The first €200,000 can be taken tax free, with the remaining €375,000 taxed at 20%.
Someone who can take the full lump sum allowance of €575,000 would pay tax of €75,000 and receive €500,000 in their hand.
Do I have to pay tax on my pension?
Under current law, when you retire you can take some of the fund as a retirement lump sum. You will have to pay standard rate income tax on any retirement lump sums between €200,000 and €575,000. Any amounts over €575,000 will be taxed as income at your marginal rate.
The Universal Social Charge, PRSI (if applicable) and any other tax or levies will also be taken. You will have a number of options as to how you can use the rest of your pension fund, and how you are taxed will depend on which one you choose.
- If you choose to buy a pension for life (annuity), your income will be taxed as income in the normal way and will include any tax due at that time.
• If you have the option to invest in an approved retirement fund, or approved minimum retirement fund, you will have to pay tax on any withdrawals that you make.
Under current law, the maximum pension fund allowed for tax purposes is €2,300,000 (April 2012). The relevant maximum will apply to the total of all pension funds you may hold. You will pay tax on any amount over this as a one-off income tax charge at the 41% rate when you take it when you retire. (The 41% figure is current in April 2012 but may change.)
How do I purchase an annuity/pension?
An annuity is a pension (a regular income paid to you for the rest of your life). To purchase an annuity/pension you give a sum of money to a nominated Life Company and in return they will pay you an income for life.
There are a number of different types of pensions to choose from, including the following:
- A pension paid to you for at least five or 10 years. This means that if you die during this period, the annuity will continue to pay the pension to your dependants up to the end of the five or 10-year period.
- A pension which will increase. This means your pension increases each year, to take account of inflation, when it is being paid.
- A pension for your spouse, registered civil partner or dependant. If you die before your spouse, registered civil partner or dependant, the annuity will pay a pension to them until they die.
- Annuity investment protection option which means that any remaining money not paid to you when you die can be paid to your spouse, registered civil partner or dependant. This option is only available if you take your retirement lump sum as 25% of the fund.
The type of pension you choose will affect the amount of income your pension fund can provide.
Your pension is treated as income so you will have to pay income tax at your highest rate
on withdrawal, the Universal Social Charge, PRSI (if applicable) and any other charges or levies (tax) due at that time
What is an ARF?
An ARF is a special investment fund which can give you flexibility in terms of how you use your retirement fund. With an ARF you manage and control your retirement fund and can invest it in a wide range of different investment funds. You can also make withdrawals as you need them. And because you own your fund, you can leave it to your dependents when you die.
Before you invest in an ARF, you must meet one of the following conditions (unless you have inherited an ARF or AMRF from your spouse or registered civil partner).You must set aside €63,500 in an AMRF until you reach 75.
Or, you must buy a pension for life (annuity) with this money (€63,500).
Or, you must have a guaranteed pension income for life of €12,700 a year.
The limits above may change in the future.
What is an AMRF?
You must take out an AMRF if you have chosen the ARF route but do not have a guaranteed pension income for life of at least €12,700 a year already in place or have not used €63,500 to buy a pension for life.
The main difference between an AMRF and an ARF is that, until you are 75 years old or you become in receipt of the required guaranteed pension income from other sources, you may only withdraw any gain you make within the AMRF over and above the original amount you invested but cannot make withdrawals from the original amount invested.
Are there any restrictions to investing in an ARF?
To invest in an ARF, you must be able to show that you have a guaranteed pension income for life from other sources of at least €12,700 a year.
Examples of the types of guaranteed pension income for life acceptable under this legislation include:
- State Pension benefits
2. any pensions paid from occupational pension schemes;
3. an annuity guaranteed for life which you have bought with the proceeds of another pension fund.
If you do not have a guaranteed pension income for life of €12,700 a year, you must invest the first €63,500 (or the balance of the fund if less) in an AMRF or buy an annuity for the same amount.
The limits above may change in the future.
An AMRF is similar to an ARF, except that there are restrictions on what you can take from the fund. You can withdraw any gain you make within the AMRF over and above the original amount you invested. You also can buy an annuity with the fund at any stage during the term of your AMRF plan.
Can I access my pension benefits before I reach 65 years?
It may be possible to take your retirement benefits prior to normal retirement age. There are rules regarding taking benefits early and you should contact us to establish if this is an option for you.
How can we help?
The choices made when you retire will have financial consequences for the remainder of your life. It is important that you make an informed decision and understand all the options available to you. At UFS, we offer a professional pension advice service where we consider all the options and help you decide what combination may suit your needs best.
We have no ties to any bank or insurance company and can therefore compare the market to get the best outcome for our client.