Pensions - How do they work?

Company and Personal Pensions 

A personal pension plan is available to any person who does not have a pension provided by their employer or is a self-employed individual. They are a tax efficient method of funding for income in the years where you will no longer be able to work due to age or ill health.

How do they work?

In return for the monthly contributions that you pay, the insurance company will invest the money in a tax-free fund over the years to your retirement date. The accumulation of your contribution and the investment return gained on your behalf are credited to your plan. This is known as the pension fund cash value. 

At retirement date this cash fund is used to buy an annuity or pension for you. If you are married at this stage you can opt to have a pension paid to your wife after your death in retirement. The growth of your fund over the years is entirely tax-free but your pension income will be taxable.

Lump Sum contributions can also be made separately or in conjunction with a regular monthly or annual contribution.

For Company Owners/Directors, they may elect to provide a pension based on:

  1. The contributions the company can afford
  2. Contributions to target a specific retirement goal, or percentage of final salary.

 What happens at retirement date?

You can decide to take your retirement benefits at any time between age 60 and 75. You may be able to retire early for reasons of serious ill health. The Revenue Commissioners may allow retirement before age 60 if you are permanently unable to work.

 Personal Pensions:

 When you reach your selected retirement date you can elect to have the following choices:

  1. Take a pension for life on a joint basis if married. OR,  
  2. Take a tax-free lump sum of 25% of the pension fund value

                                                Plus

           With the balance of the fund you can then choose a lower pension.

ARF/AMRF option:

You may decide to take your pension fund in cash at retirement. In that case the fund value is taken out less an income tax deduction. The client is then free to invest the money where they like. Under the ARF/AMRF option a sum of €63,500 must ne invested in an AMRF until age 75. The balance of funds can then be invested in an ARF and left to grow until the client wishes to draw money as an income.

 Company Pensions

 At Retirement you can choose to take the following benefits:

  1. Pension for life, with a widows Pension included
  2. Take a tax free lump sum if 1.5 times your final income plus a pension for life.
  3. Money may be transferred to an ARF or an AMRF

Maximum Pension available at Retirement:

  1. Maximum pension available at retirement is 66.66% of final salary.
  2. Retirement age can be any age from 60 to 70 years of Age
  3. Additional funding may be added to provide benefits for Widows on the member’s death in service or in retirement. The maximum widows pension is 44.44% of final salary.
  4. Life assurance cover and salary/income protection cover can also be included
  5. Contribution protection can also be included. This ensures your pension contributions are insured and continue to be paid in the event of long-term absence from work.

Option 1: Buying an annuity

After you take your tax-free cash you can use the balance of your fund to buy an annuity. An  Annuity provides you with a guaranteed income for the rest of your life. When you buy the annuity you have several additional options including guaranteeing the period of payment, automatic increases to allow for inflation and providing a pension for dependants.

The options you choose to include will affect the amount of pension your fund can provide. You may use your fund to buy an annuity with any Company you choose.

Option 2: Investing in an Approved Retirement Fund.

Approved Retirement Funds (ARFs) and approved Minimum Retirement Funds (AMRFs) are Funds managed by qualifying fund managers in which you can invest the proceeds of your pension fund when it matures.

After you have taken your tax free lump sum, €63,500 or the remainder of the pension fund if less,must be transferred to an AMRF or used to buy an annuity payable to you. Any balance over €63,500 can be invested in an ARF or withdrawn as cash. Any cash withdrawn at this stage will be taxed as income.

The maximum tax-free lump sum available is 25% of the fund value. I will always recommend that if my client is married at retirement date that the pension be taken on a guaranteed 10 years basis. This means that in the event of my client's death during the first 10 years of retirement his wife will receive his pension cheque for the balance of 10 years. She then will receive a pension of 66.66% of her husband's income for the rest of her life.

 

What happens in the event of my death prior to retirement?

If you die before reaching your retirement date the full cash value of your pension fund is payable to your wife or to your legal representatives. In the early years the fund will be low but it will build up to a large lump sum. You can add life assurance cover to the pension, which will give a guaranteed minimum level of lump sum coverage to your family in the early years. Tax relief is also available on life assurance cover when added to a pension plan

Optional Extras available on most Pension Plans.

Premium Protection in the event of illness

It is possible to insure your pension contribution if you are out of work due to illness or accident lasting more than 13 or 26 weeks. The insurance company will pay your premium for as long as you are out sick over this initial period and up to your selected retirement date if necessary.

Salary Protection in the event of illness.

It is possible to have your income insured in the event of loss of work due to illness or accident. The maximum level of salary that is insurable is 66.66% of your salary and is payable after 13 or 26 weeks of illness. The benefit can increase by 5% p.a. whilst claiming. The benefit is payable for the duration of the illness or up to the selected retirement date.

 

 

 

 

 

 

 

 

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