Brendan Burgess
Founder
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Thanks to Alan Moore and d53 for their comments and corrections
If you are self employed or if you are an employee who does not have an occupational pension scheme, you must provide your own pension. The best way to do this is through a standard PRSA which stands for Personal Retirement Savings Account.
A PRSA is a contract between you and a life insurance company. It is very flexible. If your employer wants to, he can contribute to it. You bring it with you if you change jobs. If you are not happy with the company managing your PRSA, you can transfer it to a different company. Charges are regulated to reduce the chances that you get ripped off.
When you retire, you will have a fund of money. You can take 25% of it tax free. With the balance you can buy an annuity or leave it invested in an ARF/AMRF (Approved Retirement Fund) and draw it down as you need it.
Tax relief
Broadly speaking, you get tax relief each year up to the following percentages of your salary:
Under 30 - 15%
Under 40 - 20%
Under 50 - 25%
Over 50 - 30%
These contributions apply to earnings subject to a cap of €254,000.
Where should I invest my pension scheme money?
Your pension scheme should allow you a choice of where to invest your money – typically 100% equities, 100% bonds or a mix of equities and bonds.
You should invest 100% in equities when you are younger as equities are expected to outperform over the longer term.
The traditional view is that you should gradually switch to bonds as you approach retirement. I disagree with this view. When you retire, you don’t have to cash your fund, so you can remain fully invested in equities.
This strategy of investing 100% in equities might not suit everyone's risk profile, so you should choose the level of equities which suits you.
All PRSAs follow a default investment strategy unless the contributor elects otherwise. This strategy must be certified by the actuary.
Can I transfer my ordinary company pension scheme to a PRSA when I leave my current employer?
You can in theory, but at present, insurance companies are not accpting transfers in.
I don't have a pension scheme. What does my employer have to do?
Your employer must provide you with access to a PRSA and facilitate you by making deductions from your salary.
Your employer does not have to make any contributions, but if he does, the combined maximums are as per the contribution limits above.
How much do I need to invest to get an adequate pension?
Eagle Star has provided the following figures:
If you start contributing 20% of your salary at age 30, you will get a pension of 36% of your final salary when you retire at aged 65.
If you wait unitl you are 40, you will get only 26% of your final salary.
A pension should form just one part of your overall financial planning. You should not look at it in isolation. Your total wealth includes your home and any other investments, although many advisors believe you should exclude your home from any calculations. Financial advisors suggest that you should fund your pension so that it provides 2/3rds of your salary when your retire. This is fine as long as you have plenty of spare money to invest. But it is a big mistake to scrimp and save now because you are afraid of retiring in poverty. Try to get a balance between scrimping and saving and squandering your money.
Buying your own home is an important part of long term financial planning. Do not over contribute to a pension until you have bought your own home and until you have your mortgage down to a comfortable level. It’s no use having a fantastic pension fund, if you can’t manage your mortgage repayments.
Contributing to an SSIA also makes more sense than contributing to a PRSA.
(A fuller discussion of this issue will be provided later)
What age can I retire at?
You can draw a benefit from a PRSA at any time between the ages of 60 and 75. You don’t need to retire to draw a benefit.
For employees only, you can draw a benefit from age 50, if you retire.
What happens when I retire?
On retirement you can take 25% of your fund as a tax-free lump sum.
You have three options with the balance:
1) You can buy an annuity from a life insurance company
2) You can take it as cash, but it will be taxed at your top rate.
3) You can put it into an Approved Retirement Fund (ARF) or Approved Mininum Retirment Fund. This continues to grow tax-free. When you make a withdrawal from your ARF, it is treated as income and taxed as normal. Full details on ARF options are at:
From which company should I get my pension fund?
There are standard PRSAs and non-standard PRSAs. The charges of a standard PRSA are capped at 5% of the contributions paid and the ongoing fund charge cannot exceed 1% per annum of the fund's assets. There are no limits on the charges of non-standard PRSAs.
What are the advantages of PRSAs over Personal Pensions?
A Personal Pension is another name for what is more technically correctly referred to as a Retirement Annuity Contract. Until the introduction of PRSAs, they were the only option open for those without pension schemes.
With a PRSA, you can retire at 50. With a Personal Pension, a healthy person cannot access it until 60.
There is no regulation of charges with a Personal Pension.
You can switch provider with a PRSA and neither the old company nor the new company is allowed to charge you.
You can contribute to a PRSA while you are unemployed, although this makes little sense.
Employers are not allowed to contribute to Personal Pensions.
The one advantage of a Personal Pension over a PRSA is that you can use part of your Personal Pension contribution to buy life assurance. So, you are, in effect, getting tax relief on life insurance premiums. However, there is nothing to stop you having a PRSA for your pension and a Personal Pension for life insurance.
Occasional Questions
What’s the significance of 31 October?
If you make a contribution on or before 31 October and choose to designate it as backdated to 2002, you will be eligible to claim a refund of tax paid for 2002.
Can I manage my own pension fund?
Can I borrow to buy a property via my PRSA?
No – The option for a pension fund to borrow money is restricted to Director’s Pensions and Occupational Pension Schemes.
What is a pension mortgage?
A pension mortgage is an interest only mortgage. You only pay the interest on the loan, you make no capital repayments. So after 20 years, you will still owe the lender the full capital. The lender requires you to contribute to a pension scheme, so that when it matures you will be able to pay off the loan with the tax free lump sum.
What happens to my pension fund if I die before I retire? It passes to your estate free of any tax.
If you are self employed or if you are an employee who does not have an occupational pension scheme, you must provide your own pension. The best way to do this is through a standard PRSA which stands for Personal Retirement Savings Account.
A PRSA is a contract between you and a life insurance company. It is very flexible. If your employer wants to, he can contribute to it. You bring it with you if you change jobs. If you are not happy with the company managing your PRSA, you can transfer it to a different company. Charges are regulated to reduce the chances that you get ripped off.
When you retire, you will have a fund of money. You can take 25% of it tax free. With the balance you can buy an annuity or leave it invested in an ARF/AMRF (Approved Retirement Fund) and draw it down as you need it.
Tax relief
Broadly speaking, you get tax relief each year up to the following percentages of your salary:
Under 30 - 15%
Under 40 - 20%
Under 50 - 25%
Over 50 - 30%
These contributions apply to earnings subject to a cap of €254,000.
Where should I invest my pension scheme money?
Your pension scheme should allow you a choice of where to invest your money – typically 100% equities, 100% bonds or a mix of equities and bonds.
You should invest 100% in equities when you are younger as equities are expected to outperform over the longer term.
The traditional view is that you should gradually switch to bonds as you approach retirement. I disagree with this view. When you retire, you don’t have to cash your fund, so you can remain fully invested in equities.
This strategy of investing 100% in equities might not suit everyone's risk profile, so you should choose the level of equities which suits you.
All PRSAs follow a default investment strategy unless the contributor elects otherwise. This strategy must be certified by the actuary.
Can I transfer my ordinary company pension scheme to a PRSA when I leave my current employer?
You can in theory, but at present, insurance companies are not accpting transfers in.
I don't have a pension scheme. What does my employer have to do?
Your employer must provide you with access to a PRSA and facilitate you by making deductions from your salary.
Your employer does not have to make any contributions, but if he does, the combined maximums are as per the contribution limits above.
How much do I need to invest to get an adequate pension?
Eagle Star has provided the following figures:
If you start contributing 20% of your salary at age 30, you will get a pension of 36% of your final salary when you retire at aged 65.
If you wait unitl you are 40, you will get only 26% of your final salary.
A pension should form just one part of your overall financial planning. You should not look at it in isolation. Your total wealth includes your home and any other investments, although many advisors believe you should exclude your home from any calculations. Financial advisors suggest that you should fund your pension so that it provides 2/3rds of your salary when your retire. This is fine as long as you have plenty of spare money to invest. But it is a big mistake to scrimp and save now because you are afraid of retiring in poverty. Try to get a balance between scrimping and saving and squandering your money.
Buying your own home is an important part of long term financial planning. Do not over contribute to a pension until you have bought your own home and until you have your mortgage down to a comfortable level. It’s no use having a fantastic pension fund, if you can’t manage your mortgage repayments.
Contributing to an SSIA also makes more sense than contributing to a PRSA.
(A fuller discussion of this issue will be provided later)
What age can I retire at?
You can draw a benefit from a PRSA at any time between the ages of 60 and 75. You don’t need to retire to draw a benefit.
For employees only, you can draw a benefit from age 50, if you retire.
What happens when I retire?
On retirement you can take 25% of your fund as a tax-free lump sum.
You have three options with the balance:
1) You can buy an annuity from a life insurance company
2) You can take it as cash, but it will be taxed at your top rate.
3) You can put it into an Approved Retirement Fund (ARF) or Approved Mininum Retirment Fund. This continues to grow tax-free. When you make a withdrawal from your ARF, it is treated as income and taxed as normal. Full details on ARF options are at:
From which company should I get my pension fund?
There are standard PRSAs and non-standard PRSAs. The charges of a standard PRSA are capped at 5% of the contributions paid and the ongoing fund charge cannot exceed 1% per annum of the fund's assets. There are no limits on the charges of non-standard PRSAs.
What are the advantages of PRSAs over Personal Pensions?
A Personal Pension is another name for what is more technically correctly referred to as a Retirement Annuity Contract. Until the introduction of PRSAs, they were the only option open for those without pension schemes.
With a PRSA, you can retire at 50. With a Personal Pension, a healthy person cannot access it until 60.
There is no regulation of charges with a Personal Pension.
You can switch provider with a PRSA and neither the old company nor the new company is allowed to charge you.
You can contribute to a PRSA while you are unemployed, although this makes little sense.
Employers are not allowed to contribute to Personal Pensions.
The one advantage of a Personal Pension over a PRSA is that you can use part of your Personal Pension contribution to buy life assurance. So, you are, in effect, getting tax relief on life insurance premiums. However, there is nothing to stop you having a PRSA for your pension and a Personal Pension for life insurance.
Occasional Questions
What’s the significance of 31 October?
If you make a contribution on or before 31 October and choose to designate it as backdated to 2002, you will be eligible to claim a refund of tax paid for 2002.
Can I manage my own pension fund?
Can I borrow to buy a property via my PRSA?
No – The option for a pension fund to borrow money is restricted to Director’s Pensions and Occupational Pension Schemes.
What is a pension mortgage?
A pension mortgage is an interest only mortgage. You only pay the interest on the loan, you make no capital repayments. So after 20 years, you will still owe the lender the full capital. The lender requires you to contribute to a pension scheme, so that when it matures you will be able to pay off the loan with the tax free lump sum.
What happens to my pension fund if I die before I retire? It passes to your estate free of any tax.