Retirement Planning – A Pleasure or a Pain?

All too often people approaching retirement do not place enough importance on personal retirement planning to ensure they take full advantage of the options open to them. I advise my clients to take the time now — at an early stage in your financial planning process — to think about the choices you have about how you would like to spend your time during retirement. If you start investing earlier in your working life, it will allow you to accumulate and grow more funds over the following years, so that you have considerable funds for navigating your retirement years.

Pension arrangements have a number of advantages:

  • when people come to retire they usually experience a reduction in income – your pension fund makes up for some of this loss of income in retirement;
  • pension funds can provide protection in the form of lump sums and pensions to dependants in the event of a member’s untimely death;
  • in order to encourage you to arrange your own pension fund, the State provides tax relief on contributions made to pension schemes and the growth in their investments.

Your Pension Options

Your options will depend on your employment situation. If you are an employee you may be able to join a pension scheme sponsored by your employer. Employees in the public sector can join their public sector pension scheme. The self-employed can take out a personal pension. Personal Retirement Savings Accounts (‘PRSA’) are open to virtually anyone to save for retirement.

It is important to note that there is no legal obligation on an employer to set up or contribute to a pension scheme. If your employer does not have a pension scheme, or if you are an ‘excluded employee’, your employer will need to provide you with access to at least one Standard PRSA.

If you are not already a member of a pension arrangement you should talk to your employer or a professional financial adviser to determine the various options that are available to you.

Tax

As mentioned previously, one of the most noteworthy advantages of pension planning, particularly when compared with other forms of saving, is the tax relief you can get on contributions and investment growth.

  1. You will receive income tax relief on your own contributions to your pension arrangement, within certain limits, and you are largely not taxable on your employer’s contributions to your retirement fund. This is effectively tax-free pay.
  2. Also, the investment returns earned by your pension fund are exempt from capital gains tax and the lump sum you can take at retirement is tax-free up to certain limits.

What happens in Retirement?

Retirement brings you the freedom and time that a working life makes difficult. It’s an opportunity to gather experiences and participate in activities you might have found hard to manage in the middle of the vast responsibilities of a busy family life and career. Nevertheless, enjoying this new-found quality of life in retirement will require substantial savings. Shrewd and responsible retirement planning enables you to make your retirement years a time to thrive and indulge on those activities and holidays that you always dreamt of.

 

On the other hand, inadequate and poor retirement planning can force you to economize and save and to worry over your resources. This can make retirement a worrying time, as opposed to a time when you can appreciate your new found freedom.

Life Expectancy in Ireland

Life expectancy Ireland is continuing to rise for both men and women, with the gender gap narrowing. An Irish man is now expected to live 78.3 years, and an Irish woman for 82.7. Analysis by the CSO from the years 2010 to 2012, shows life expectancy has risen dramatically – 20.9 years (36.4%) for men and 24.8 years (42.8) for women – since the first official life table was taken in 1926.

As our life expectancy increases, the importance of providing enough of a financial nest-egg to support yourself grows more important. Even though it is a nice problem to have, it can also create serious problems for those who only saved enough to last them through a certain period, say until age 75, and at that moment find they have several more years left to fund their lifestyle, health requirements and maybe even a care home.

Some investors make the mistake of only planning to have sufficient funds to last until the average life expectancy, instead of being vigilant and planning to live beyond the average age.

Follow these failsafe steps to retirement income planning:

  1. Develop a financial action plan with your Financial Planner as soon as is possible.
  2. Identify & compare your income and expenses to determine any shortfalls or surpluses.
  3. Review & examine the various retirement income strategies available to you.
  4. Assess & compare the retirement income options offered.

Keeping these key points in mind, it’s sensible to seek guidance and advice from a financial planner for their professional views on your financial action plan.

Your retirement will be far enjoyable and productive if your pension income is structured to match your lifestyle choices, now and into the future.

Gerard O’Brien LL.B LL.M CFP® QFA is a Certified Financial Planner and the Owner of Heritage Wealth, a Financial Planning practice based in Main Street, Midleton, Cork. For more information, contact Gerard at gerard@heritagewealth.ie www.heritagewealth.ie