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A finance expert shares everything to know about pension planning


by Nick Charalambous
20th Jun 2024

For many of us, getting our finances in order can seem like an extremely daunting task. To make things a little easier, we’ve enlisted financial expert Nick Charalambous to break things up into bite size chunks, and demystify the process for those just starting out on their pension planning journey.

Pensions are a subject that many of us tend to put on the back burner due to the confusing jargon and numerous options, or simply because we feel that retirement is too far away to worry about. However, when it comes to securing a stable financial future, pension planning plays a crucial role. With a little guidance, you can set yourself up for a comfortable retirement.

Understanding pensions

A pension is a long-term savings plan, which for most is accessible from age 50 years of age onwards, and is aimed at providing you with income during your retirement years. Given people are living longer, this is more important than ever.

In Ireland, there are two main types of pensions:

1. State Pension: The State Pension (Contributory) is a payment made by the Irish Government to those aged 66 or over who have made sufficient Pay Related Social Insurance (PRSI) contributions during their working life. The amount received depends on the person’s PRSI record, normally 10 years of working history gives you full entitlement to the Irish State Pension, which is currently around €280 per week.

2. Private Pension: These are pension plans arranged by individuals or their employers. Private pensions are used as a supplement to the state pension and essentially boost your income.

The power of starting early

The earlier you start contributing to your pension, the more time your money has to grow. Thanks to the power of compound interest, even small contributions made in your 20s or 30s can accumulate into a substantial retirement fund over time. For example, if you invest €1,000 in a pension policy with a 5% growth rate, you earn €50 in the first year, giving you a fund value of €1,050. The next year, you earn interest on that €1,050, and so on. Starting your pension journey, if you haven’t already, is pivotal for a secure future.

How to get started

1. Assess your situation: Understand your income, expenses and debts to determine your contribution capabilities.

2. Set clear goals: Define what you want your retirement lifestyle to be and calculate the necessary savings.

3. Speak to an impartial financial broker: They will ensure you get the right pension and fund(s) that suit your needs, and it is important to ensure you review this once a year to allow for any changes to your circumstances. One important consideration is to be mindful of fees. These will erode your overall amount, and small differences in fees can cost you thousands of euros.

Tax benefits and employer contributions

One of the significant advantages of contributing to a pension is the tax relief. Depending on your income, you can receive tax relief at 40% (if you are earning less than €42,000 per year, the tax you get back is reduced to 20%. This means that for every €10,000 you invest, you could receive up to €4,000 in tax back, equating to a 66% gain). On top of this, the savings grow tax-free, and you are entitled to a certain proportion tax-free when you draw your pension down.

If your employer offers a matching pension scheme, this is essentially free money added to your pension fund. I can’t underestimate how crucial it is to take full advantage of such schemes to maximise your retirement savings.

The future of pensions: Auto-Enrolment

Starting from January 1, 2025, Ireland will implement an auto-enrolment pension scheme for all workers earning €20,000 per year or more aged between 23 to 60 years of age. This will affect 700,000 workers in Ireland, 200,000 of which are higher-rate taxpayers.

This means that all employers not already contributing to a pension scheme, under the above criteria, will be required to automatically enrol in a pension. However, there are limitations on the government’s auto-enrolment pension in relation to flexibility and for higher rate taxpayers losing 15% tax relief on their payments. This change underscores the urgency for individual pension planning and highlights the increasing importance of securing your financial future.

Conclusion

Pension planning is not just about securing an income; it’s about peace of mind and ensuring you can enjoy life post-retirement and also retiring early. By breaking down the basics and taking a proactive approach, you can navigate the world of pensions. Your future self will thank you for investing in a pension today.

At Alpha Wealth, we offer a variety of tools and resources to demystify the pension planning process and make it as straightforward as possible. Our team of financial planners is always on hand to provide expert advice tailored to your unique circumstances. Taking a small action today could have a great impact on your future.

Nick Charalambous

About Nick Charalambous: Managing Director, Alpha Wealth

With a Cypriot background and having been raised and educated in London, Nick has worked in investment and private banking for some of the biggest banks in the world. With over 25 years of financial services experience in Cork, primarily as a financial advisor with AIB and Ulster Bank, Nick has built up an extensive knowledge of the financial services environment, which he shares with his clients in many areas of personal finance.

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