We all know that trying to understand pensions, financial independence and retirement is not easy. Let’s get that out of the way at the outset of this article! But how can we work to understand the various dimensions of the pension world and how this solution can form part of an overall plan to seek financial independence as early in life as possible?
I believe that we need to set-out and establish some important ground rules.
- Pensions are a long-term investment, which can potentially lead to financial independence, if funded properly and reviewed regularly
- The State contributory old age pension on its own is intended for subsistence only – it should be considered as a safety-net
- The government has made available a generous package of tax benefits to assist us to achieve a comfortable retirement
- There is no access to the pension fund until retirement. It is crucial that clients understand the access rules, and are clear that a pension is not an emergency fund, a rainy-day fund, or a safety net in the event of unemployment or business failure
- Married couples and civil partners over the age of 65 currently benefit from an exemption limit in the tax code, which allows such couples to jointly earn up to €36,000 per annum income tax free (marginal income tax relief is potentially available for incomes between €36,000 and €72,000 depending on your circumstances). PRSI and USC may apply to the income. This is a significant income tax concession in retirement.
Once these important principles are understood, the focus can now be brought onto the benefits, the security and potential financial independence that private pensions can provide.
What is Financial Independence?
Nowadays, people want to have fun in retirement: travel more, spend more time with family and friends, learn some new skills, start a business and stay active.
It’s all about having the freedom to do all the things you always wanted to do, at the earliest age possible. But given longer lifespans and concerns about the financial status of the State Pension, what should be your target income to fund a potentially decades-long retirement?
How much you should be saving will depend on your income requirements in the future. However, if you want financial independence sooner rather than later, you should not delay saving. The earlier the contributions begin, the greater the investment value at retirement. This is not only due to the fact that more contributions can be made, but also due to the power of compounding.
We strongly believe that a detailed cash-flow analysis is a key precursor to making informed decisions before you decide to invest, top-up your pension, buy that boat, gift your kids or sell that negative equity property. Many clients find that a personalized cashflow helps clients understand how each financial decision could impact their current / future life.
There are a complexity of rules governing the vast range of retirement planning options that are available to you. It is therefore important that once you have made the decision to fund for financial independence, that specialist and independent advice is sought to provide you with the most suitable planning structure.
In summary, people need to consider now how long they want to be in the workforce, who they will be responsible for in retirement, all their sources of income (including State Pension, property rental income, investment returns and dividend income) and estimate what their future health costs could be to come up with a clear estimate of their savings needs.
Gerard O’Brien LL.B LL.M CFP® QFA is a Certified Financial Planner and the Owner of Heritage Wealth Management, a Financial Planning practice based at 27 Cook Street, Cork. For more information, contact Gerard at firstname.lastname@example.org www.heritagewealth.ie
Disclaimer: All data and information provided within this article is for informational purposes only. Heritage Wealth Management Limited makes no representations as to accuracy, completeness, suitability, or validity of any information and will not be liable for any errors, omissions or delays in this information or any losses, injuries, or damages arising from its use.