Reviewing Your Retirement Plan
The closer you get to retirement age, the more important it is to review your pension arrangements on an annual basis with a financial advisor who can fully explain fees and charges; your projected income; current investment risk and all the tax relief available.
Here is what you should be considering as you look to the future…
The State pension (contributory and non-contributory) is no longer paid from the age of 65. You can only claim it from the age of 66, rising to 67 in 2021 and 68 in 2028. This is an important consideration when planning your future income flow.
Is your current pension enough to fund the lifestyle you desire after you retire? Traditionally, you were advised to “save half your age” towards your pension for each working year. In your 30s, for example, this would translate to 15% of your income but of you only start a pension at the age of 50, you would need to save 25% of your income.
You may think you have a sizeable pension pot built up but when you consider that your annuity may have to provide you with an income until the age of 90 or older then careful calculation is required. You also need to factor in the potential cost of long-term health care for you and/or your spouse.
The main risks in pension investment are that the fund will fall in value, the fund’s returns will not keep pace with inflation and that the fund will not grow enough to provide sufficient pension benefits.
In Defined Benefit (DB) pension schemes, the investment risk falls on the employer. However, so-called “gold plated” DB pensions are now rare outside the Public Sector. Today, most employees are in a Defined Contribution (DC) pension scheme where they shoulder the risk.
Self-employed people can save for their pension through a Personal Retirement Savings Account (PRSA). There are a variety of funds available, including high risk, medium risk and low risk.
If you are nearing retirement age and have a DC pension or a PRSA, it’s time to review how your funds are being managed and invested. For example, you may choose to move from a high-risk, high return fund in your 30s to one with a lower risk and lower return in your 50s.
It is always wise to seek expert financial advice to ensure your pension fund is on the right track. You should feel comfortable with the level of risk you are taking on.
If your retirement fund is not as large as you expected, there is still time to top it up through Additional Voluntary Contributions (AVCs) and enjoy tax relief at the marginal rate.
For example, from the age of 60 you can invest up to 40% of your income (capped at €115,000) into your pension fund. A financial adviser can explain the best tax-friendly ways to maximise your contributions.