Approaching Retirement

Approaching Retirement

Approaching retirement involves crucial steps to ensure financial preparedness. Confirming retirement readiness through a thorough assessment of your pension and overall financial situation is essential. Explore options like downsizing and delaying retirement to align with your lifestyle and financial goals.

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When can I retire?

If you set up a retirement plan while self-employed or with an employer who didn’t contribute to your pension, you have a Personal Pension. The value and regulations of this pension will determine your retirement benefits.

If you were employed and participated in a pension scheme where your employer made contributions, you have a Company Pension. This could be a Defined Contribution (DC) pension, a Defined Benefit (DB) pension, or an Executive Pension Plan. If you choose to boost your company pension by making additional voluntary contributions, you have an Additional Voluntary Contribution (AVC) pension.

Alternatively, you may have a Personal Retirement Savings Account (PRSA), which is available to various individuals including employees, self-employed individuals, homemakers, the unemployed, and others. If you left an employer and transferred your pension fund to an independent pension account, you have a Retirement Bond.

What are the steps to get ready for retirement?

1. Reassess your Goals

Take time to review and refine your retirement goals. Consider the lifestyle you desire during retirement and adjust your financial plan accordingly. Set new savings targets based on your anticipated income needs.

2. Boost contributions 

As you approach retirement age, ensure your pension contributions are sufficient for a financially secure retirement. Consider increasing contributions, including Additional Voluntary Contributions (AVCs), to maximize savings potential and take advantage of potential tax benefits.

3. Review Investments

Adjust your investment strategy as retirement nears. Shift towards more conservative investments to protect your savings from market volatility and ensure a stable income during retirement. Seek advice from a financial advisor to optimize your portfolio.

4. Track down old Pensions

Don’t overlook old pension accounts from past employment. Conduct pension tracing to locate forgotten accounts, potentially consolidating them to boost your retirement savings and simplify your financial situation.

5. Create a Mortgage Strategy

Consider strategies such as refinancing for lower rates, paying off the mortgage, or redirecting funds towards pension contributions. Choose the approach that aligns with your financial goals and circumstances to reduce post-retirement expenses and enhance financial security.

6. Consider Downsizing

Downsizing your home presents financial advantages, including proceeds from selling your current property, lower housing costs, reduced utility expenses, and decreased maintenance burdens, enabling you to redirect funds towards retirement savings and potentially minimize retirement expenses.

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What are my options at retirement?

You will have various options when you retire, and, subject to specific guidelines from Revenue, you can potentially combine these options. The range of choices accessible to you upon retirement is contingent upon the type of pension you hold. There are four main options available to you:

  1. Take a tax-free retirement lump sum (subject to a lifetime limit of €200,000)
  2. Take a taxed retirement lump sum
  3. Invest in an Approved Retirement Fund (ARF)
  4. Buy an Annuity

How the tax-free lump sum work

First €200,000

Tax Free Lump Sum

Next €300,000

Subject to standard rate income tax

Any other Lump Sums

Subject to higher rate income tax

What is an ARF?

An Approved Retirement Fund is a personal investment account into which an individual can (in certain circumstances) transfer part of their retirement fund, instead of using those funds to buy an annuity or take it as a taxable lump sum. The balance of an ARF on death is paid to the holder’s estate.

The ARF owner can withdraw funds from the ARF whenever required. There is no maximum rate of draw down from an ARF. An individual can withdraw the full balance in an ARF at any time.

Any withdrawal made during the lifetime of the ARF holder is subject to income tax under PAYE, USC and Class S PRSI (if under 66)

ARF Offers:

  1. Tax-free investment returns.
  2. Option of lower annual taxable withdrawals.
  3. Ability to pass the balance of the ARF to a spouse’s ARF without any immediate tax charge.

What is Annuity?

An annuity is a single premium insurance policy where, in return for a lump sum payment, the selected life insurance company guarantees to pay a specified level of regular income for entire life of the individual insured by the policy.

A single life annuity ceases on the death of that individual, apart from outstanding payments under the guarantee period (if applicable).

An annuity can provide a continuing payment of part or all of the annuity to a nominated person, typically a spouse, following the individual’s death; this is called a joint life annuity or an annuity with a reversion, i.e. part or all of the annuity ‘reverts’ to another individual following the death of the individual who took out the annuity.

E.g. James is now 65 years old and a RAC fund of €200,000. Taking €50,000 lump sum, purchasing an annuity for €150,000. This guarantees €6000 for the rest of his life, with a guarantee of 5 years. If James dies 3 years later, €6000 per year will be paid to James’ estate for two years. Or pay the outstanding to his estate.

Your Questions Answered

We’re living longer than previous generations. Upon retirement, on average we will have 20-30 years of retirement. A pension plan will make sure you’re financially sound for these years. Whether you wish to travel, retire to the country, or spend time with your children & grandchildren.

The amount you will receive per month entirely depends on how much you’re willing to pay per month, the length of time you’ve been making contributions, the type of pension plan and its investment return. You can also choose to receive a lump sum upon retirement or not.

As of today, the State Contributory Pension is about €240 per week. For most people, during their 20-30 years of retirement, this simply isn’t enough. When you pay into a pension plan, you will receive both the state pension (If available to you) and your Pension Plan.

Tax relief reduces the actual cost of your pension. You do not have to pay tax on money that you put into a personal pension (This falls within the limits set out below). This is calculated at the highest rate of tax you pay (Currently 20% / 40%)

Monthly contribution = €100
Tax Relief (40%) = €40
Cost to you = €60

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