A 20-year-olds guide to Pensions
Your pension is the key that will unlock the door to a comfortable old age, ideally providing enough income for a fulfilling and enjoyable retirement.
Whether that be playing golf, soaking up the sun abroad or spoiling your grandchildren, it’s never too early to start thinking about how to fund your later years.
Here are the main types of pensions in Ireland and how they work.
STATE (NON CONTRIBUTORY) PENSION
The days of retiring aged 65 are long gone. You are not entitled to a non-contributory (basic) State pension until your 66th birthday, rising to 67 in 2021 and 68 in 2028. The State pension is means tested and amounts to just €237 per week, around €12,300 per year. If you are lucky enough to have the mortgage paid off, this might be enough to cover food and bills. But with an increasing number of young people stuck in the rental market until well into their 30s, it is likely that mortgage repayments for a generation of delayed home owners will result in them repaying home loans well beyond the age of retirement. For anyone still renting or repaying a mortgage, €237 will not be enough to live on.
CONTRIBUTORY STATE PENSION
You qualify for extra State pension benefits if you satisfy certain criteria, such as having made at least 520 (10 years) full-rate PRSI contributions before the age off 66. The rates vary depending on your number of PRSI contributions, ranging from €99.20 to €248.30 per week. There are credits available for people who were not in work due to homemaking or caring duties.
OCCUPATIONAL PENSION SCHEME
This is provided by some, but not all, employers and generally falls into two categories, defined benefit (DB) and defined contribution (DC).
A DB scheme provides a set level of pension at retirement. In the public sector, this used to be based on final earnings but civil servants hired since 2013 will receive a pension based on their career average earnings. In the private sector, a DB annuity is usually based on 1/60th of final salary multiplied by number of years of service, up to a max of 40 years. Most private sector pensions are DC, with contributions from employers and employees invested to provide a retirement benefit. Trustees manage the fund and your pension will be dependent on how the investments perform. It’s also worth noting that making Additional Voluntary Contributions (AVCs) is a tax-efficient way of boosting your pension pot.
Also known as a Retirement Annuity Contract (RAC) this is a pension typically used by self-employed people. An RAC provides a tax-free lump sum and annuity at retirement. You can set up an RAC through a financial adviser or life assurance firm.
PERSONAL RETIREMENT SAVINGS ACCOUNT (PRSA)
Another type of RAC but with a bit more flexibility, it can be obtained directly from financial services companies and brokers. If your employer does not offer an occupational pension scheme, then you must be provided with access to a standard PRSA. A Standard PRSA has a maximum charge of 5% on contributions paid and 1% per annum on managed investments (in pooled funds) whereas a non-Standard PRSA has no maximum charge limit and/or allows investments in different types of funds.