Business - May 2019

Why pensions make sense

We all need to pay attention to retirement planning and our pensions. Mary Goodman Mehigan and Declan Gahan from Veterinary Ireland Financial Services, present important pension points to consider and demonstrate why pensions make sense

Pensions are the single most tax-efficient way of saving for your retirement. Here are four reasons why:

  • 40% tax relief – (marginal rate) available on all pension contributions;
    Tax-free growth – your pension fund grows tax free and is not subject to DIRT, capital gains or investment return tax like regular savings and investments;
  • Tax-free cash – you can take up to 25 per cent of your fund as tax-free cash on retirement. The first €200,000 is tax free and the balance up to €500k is taxed at 20 per cent; and
  • Reduce your tax bill by contributing to a pension plan. Your accountant will advise you of how much you can contribute to a pension yearly and the corresponding tax savings.

Life expectancy
According to the Central Statistics Office (CSO), the average life expectancy in retirement is now 86 for women and 83 for men. While this is good news, the longer you live, the more money you need to fund your retirement! Your retirement could be a quarter of your life, so will you have adequate funds on retirement to maintain your lifestyle? And, will your pension pot last as long as you?

State pension
Most people, who satisfy the appropriate PRSI requirement are entitled to the State Pension on retirement. However, it is just €248.30 per week so should not be relied upon in isolation. Also, the age at which we will be entitled to receive the State Benefit is increasing. If you were born in 1961 or after, you will not receive the State Pension until you are 68. So, although an annual pension of nearly €13,000 from the State is not to be shunned, it should be considered as more of a lifeboat than a yacht!

We are an ageing population
Currently, there are six people working for every retiree in the country. There were approximately 500,000 retires in 2010. As we are an ageing population, it is estimated that there will be approximately 1.25 million retirees by 2050 with only two people working for every retiree in the country. So, will our State Pension fund be able to maintain the level of income in the future?

How much of a pension pot do I need?
In very general terms, if you are happy to retire on half of your current income, you will need a pension pot of over 10 times your income (Table 1).

The power of compound interest
The earlier you start, the bigger your pot will be (Table 2). Every 10 years you delay, means you double the cost of how much you need to put away to get to the same place when you retire. This example shows a pension contribution of €200 per month (increasing at 5 per cent each year) and assumes annual growth of 6 per cent.

Fail to plan, plan to fail
Retirement planning lets you define your retirement goals and develop a strategy to help ensure a comfortable retirement. We can help you map out your goals and consider what retirement looks like for you.
Will you continue working in some capacity?
Will you travel, take up a new hobby, do voluntary work?
Would you like to be in a financial position to help your children or grandchildren in the future?
Decide the lifestyle you want and plan for it.

Review, review, review!
As circumstances constantly change it is important to get professional advice and review your arrangements regularly:
Review your existing pension arrangements and where they are invested;
Review your current circumstances and current retirement plans; and
Review your current risk profile.

For more information, please contact Veterinary Ireland Financial Services directly: 01 293 9333; or
Veterinary Ireland Financial Services Ltd is regulated by The Central Bank of Ireland