Your Options At 50
You’ve hit your fifth decade (congratulations!) and retirement looms on the distant horizon. Or perhaps not so distant if you fancy quitting the rat race well before your late 60s. Most forty something will be giving some thought as to how they will finance their later years. Some of you might be counting down the days until you retire while others might be dreading the thought of hanging up your boots.
Either way, a decent pension could make all the difference to your financial future.
We outline (below) the various options available, whether you own your own business or are a PAYE worker.
SELF-EMPLOYED AND NO PENSION
The good news is that it’s never too late to start a pension but you should seek advice from a financial adviser as soon as possible.
You can invest a generous portion of your income (subject to a salary cap of €115,000) into your pension from the age of 50 onwards and attract tax relief on this sum at the marginal rate.
Age 50 to 54, your pension contributions can be as high as 30% of your income, from 55 to 59 this rises to 35% and aged 60 and over, 40% of your earnings can be put in a pension fund.
Many self-employed people will have built up entitlements to a State Contributory Pension through PRSI Class S payments.
If you have no PRSI contributions and cannot afford to fund a private pension, you will be allowed to claim the (means tested) State Non Contributory Pension of approx €12,000 a year from the age of 67 in 2021 and 68 in 2028.
PRIVATE SECTOR EMPLOYEE
Most private sector workers with occupational pensions are in a Defined Contribution (DC) scheme.
You can usually take early retirement from a DC scheme any time from age 50 providing you have left service with the employer who provides the pension scheme..
The value of your pension benefits will largely depend on the value of the fund that you have accumulated by your chosen retirement age.
The benefits payable may include:
— An annuity (pension purchased from a Life Assurance Company) in exchange for the value of the accumulated fund at your retirement date.
— A tax-free lump sum (calculated by a Revenue formula) subject to a maximum of 150% of final salary. Plus an annuity in exchange for the balance of the accumulated retirement fund.
Tax-free cash of up to 25% of the value of the accumulated retirement fund with the balance put into an Approved Retirement Fund (ARF) (subject to certain conditions).
With annuity rates at an all time low, the 25% tax-free cash plus ARF option is by far the most popular choice exercised by people retiring today.
If you’re not keen on early retirement, and want to maximise your pension pot, now is the time to start (or increase) making Additional Voluntary Contributions (AVCs).
It’s the most tax efficient way to save for your retirement.
A minority of private sector workers belong to a Defined Benefit (DB) pension scheme.
Assuming the scheme is not underfunded, you can expect to receive a fixed income on retirement, depending on your earnings and length of service.
Taking early retirement can be tricky with a DB pension. You may decide to transfer into a Personal Retirement Bond (PRTB) and immediately access a tax free lump sum of 25% from the fund (tax-free up to €200,000).
It is vital to seek advice from a financial adviser before making any decision.
PUBLIC SECTOR EMPLOYEE
Often referred to as “gold plated” pensions, civil servants are entitled to retirement payments based on a percentage of their final salary.
However, for public sector employees hired from 1 January 2013 onwards, their pension is based on career average earnings, rather than final earnings.
Civil servants also receive a lump sum upon retirement of 150 per cent of their final salary (tax-free up to €200,000).
Public servants with less than the maximum 40 years’ service at retirement can purchase additional years of service through a scheme commonly referred to as ‘buying back’ years or PNS (purchase of notional service).
This is something you may choose to do in your 50s if you joined the Civil Service in recent years.
Public sector workers recruited before 1 April 2004 who did not reach the age of 65 by 26 December 2018 can now remain working (should they wish) until the age of 70.
Those who joined the public service after 1 January 2013 cannot retire until age 66, rising to 68 in 2028 (to obtain full pension benefits).
Public servants can take early retirement, of course, but it will affect their lump sump and pension pay-outs.