Types of Pensions

Types of Pensions

Private pensions in Ireland encompass various types, including occupational pension schemes offered by employers, personal pension plans initiated by individuals, and self-employed pension arrangements tailored to meet specific retirement needs.

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What is a Pension & Who is it for?

This is an investment plan that helps you save for retirement. A Personal Pension Plan is suited to those who are either self-employed, or an employee whose employer doesn’t provide a pension scheme.

Personal Pensions are relatively straight-forward and easy to set up. Our expert Pension advisers can guide you towards the latest most suitable funds to maximize your returns from your new Pension.

Without a private pension plan, any self-employed Irish person will have to rely solely on the State Pension. This is currently only €277.30 per week, as of January 2024, commencing at the age of 66, but is due to rise to age 68 in 2028.

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Types of Private Pensions in Ireland

There are two main types of pensions in Ireland:

Occupational/Company Pension

Provided by your employer, an occupational pension scheme allows you to save for retirement through contributions from both you and your employer.

Occupational pensions bring several advantages to employees and employers alike. 

They offer tax-efficient retirement savings for employees while accelerating pension growth through employer contributions, rather than just relying on the employee’s own contributions. 

This essentially provides free money for your retirement fund.

Types of occupational pensions:

Defined benefit 

A Defined Benefit (DB) pension outlines the precise retirement benefit an individual will receive. 

This determination considers variables like an employee’s years of service and salary, which in turn determines the predetermined pension amount and/or lump sum that will be disbursed upon retirement.

Defined contribution 

For Defined Contribution (DC) pensions, the amounts available for benefits at retirement or leaving service depend on the value of the investment fund accumulated for the member, and there is no guarantee of any minimum benefit. 

Most funded occupational pension schemes and all personal pensions are defined contribution.

Difference between defined contribution and defined benefit

The main difference between a Defined Benefit (DB) pension scheme and a Defined Contribution (DC) pension scheme lies in the guarantee of a set income in the former, while the latter depends on variables like your pension contributions and the performance of the fund.

Personal Pension

A personal pension, also known as a private pension, is a retirement savings plan you set up independently. You have control over your contributions and investment choices. 

Personal pensions are individual savings contracts created to deliver retirement benefits. These pensions include various options, such as a Personal Retirement Savings Account (PRSA), and Personal Retirement Bonds.

What is a PRSA pension?

A PRSA (Personal Retirement Savings Account) is a privately owned pension plan that offers flexibility in saving for retirement. 

With a PRSA, you have the freedom to make contributions at your convenience and can also choose to discontinue contributions whenever you wish.

Anyone can join a PRSA, regardless of their employment status. Whether you are self-employed or employed by a company, you can establish and maintain a PRSA.

What is a PRB?

A Personal Retirement Bond (PRB) is an individual policy established by pension scheme trustees to secure retirement benefits for a former member of the scheme. 

Essentially, if you leave a pension scheme, you have the option to transfer your pension benefits by having the fund’s value invested in a bond.

If you are considering leaving your current employer, especially if you are a member of the group pension plan, a Personal Retirement Bond (PRB) can be an excellent choice. 

Features

Suited for those seeking broad-ranging investment options with no contribution charges & are likely to continue as a sole trader until retirement. The minimum drawdown age on a Personal Pension is age 60 and a 25% tax-free lump sum (As is with a PRSA), also with the option to purchase an Annuity / Reinvest in an ARF/AMRF using the remaining 75%.

You make all of the contributions, unlike a company Pension where your employer may make additional contributions.

  • The plan is held in your name.
  • You control how much you contribute towards your Personal pension.
  • On retirement, you can take a tax-free sum of 25% of your pension.
  • Tax relief available – reducing the real cost of your pension.
  • Contributions start that suit your income from €100 per month.
  • If you change jobs, you take your Personal Pension with you.

Get Tax Relief with a Pension

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%).

Pension Income Tax Relief on Personal Pension Schemes is available at your marginal rate of tax and is capped at an income of €115,000. If you are self-employed, you must include your pension contributions in your self-assessed tax returns in order to claim the below percentages. Any payments that exceed the limit for the year can be carried forward into the following year. The max contibution age is 75 years old.

Example 1:
Monthly contribution = €100
Tax Relief (40%) = €40

Cost to you = €60

Example 2:
An employee who is aged 42 and earns €40,000 per year can get tax relief on annual pension contributions up to €10,000.

There are no limits on the total amount you can pay into your pension, but tax relief is only available on the percentage amounts of your income and age outlined below. 

Age during the year

Percentage of earnings

Under 30

15%

30 to 39

20%

40 to 49

25%

50 to 54

30%

55 to 59

35%

60 +

40%

*Data according to Aviva & Zurich Pensions Dec 2019. Percentages shown are of earnings up to €115,000. If you’re a professional athlete, your limit will be 30% of earnings. These figures are subject to change in the future.

Your Questions Answered

A pension plan is a longterm investment savings plan that helps you put something aside for your retirement. A pension plan enables you to pay regular tax-friendly installments or move one-off lump sums into a fund available to you on retirement. The amounts saved into your pension are called ‘contributions’

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.

As soon as possible. The money that you pay into your pension grows over time. It’s quite simply Time x Money. The sooner you start paying in; the more money will be available to you upon retirement.

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%)

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

If you have to retire because of medical reasons and you get Revenue approval, you can receive your benefits from your Pension immediately.

If you unfortunately pass away before you retire, your Pension will be paid to your estate.

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