Relying on a State pension alone can mean a retirement counting the pennies. A private or personal pension can make all the difference to someone when they reach retirement age. After all, you will be working hard all your life – why not invest in something that will help you to enjoy your golden years?
A pension is a retirement savings plan that you make regular contributions to, or that you can contribute a lump sum to annually. This money is managed by a life assurance or investment company, which aims to invest in things such as stocks, bonds and property or commodities with the aim of producing growth over the term of the pension.
The two main types of pensions for self-employed individuals are personal retirement savings account (PRSA) and personal pension plan (PPP).
Personal retirement savings account
If you are employed by a company, they may provide occupational pension schemes. If they do not, by law, they must offer their employees access to at least one (PRSA), which are all regulated by the Pensions Authority.
Contributions can be made to your PRSA by you, your employer or both of you, although they are not obliged to do so. Your PRSA is a contract between you and the provider, of which there are many, such as Zurich, New Ireland and Standard Life to name a few.
To get a PRSA, your employer is required to provide a contract with a PRSA provider. You can choose a different provider, but will have to pay into it yourself as opposed to your employer deducting the agreed amount from your wages. Self-employed people can also search for the providers online.
You do not have to make regular contributions although there are regulated minimums set by providers (greater than €300 a year).
All PRSAs come with a default investment strategy for those who do not want to be actively involved, but ultimately you can take control of your investment and make active decisions on where your money is invested.
Personal Pension Plan
Formally known as retirement annuity contract (RACs), PPPs can be obtained through life assurance companies, and through financial advisers. There are many on the market and you should shop around.
Some come with a minimum payment and charges such as a setup charge, fund management and allocation rate (if you invest €100 and the rate is 2%, the company keeps €2 and invests €98).
You are entitled to income tax relief on contributions paid to a PPP, which is normally claimed back from the Revenue in your annual tax return.
Neil Beirne, senior financial adviser at ifac financial planning, explains: “Depending on what rate band you’re taxed at, if you are in the higher rate, you will get tax relief at 40%. So, if you do a pension contribution of €10,000, you will receive tax relief of €4,000 on it.”
Your money is invested in the same way as PRSAs such as buying shares in different companies, buying Government bonds and investing in property.
“Most people use personal pensions because fees tend to be cheaper and fund choice is less restricted ... PRSAs make sense if someone might be going between self-employed to being an employee, or maybe have a mixture of both. With a personal pension, if you are self-employed and then you enter employment you can’t transfer the pension into your employment pension.”
Neil says that “for 90%+ of self-employed farmers, a personal pension is the best choice for them.”
“A trend we are seeing is that larger farmers are incorporating their farm. If the plan for a farmer is to incorporate within a few years, but [they] are currently a sole trader, a PRSA might be a good option as they could transfer this into their new pension when they are set up as a company.”
PPPs are not regulated by the Pensions Authority and are instead subject to tax law and financial services legislation, including law on insurance.
Like PRSAs, investments in PPPs can be transferred between providers and even into PRSAs as long as a formal agreement is made with the PPP provider.
You can draw out of your PPP after 60 regardless of retirement status or any time if in ill health. On retirement you can take a tax-free lump sum of up to 25% of the value of your investment. With PRSAs, early retirement is possible at 50 if your pension relates to PAYE income and you have left that employment. If PRSA contributions relate to self-employed income, 60 is the earliest you can retire your pension.
These pensions plans are not necessarily risk free, but the options come at varying risk levels and if you are younger, it may be better to take some risk before reducing the risk level in your 50s. After all, the aim of the game is to make your retirement as comfortable as possible. Overall market trends show growth every 10 years, even if markets do go down periodically.
Jerry O’Neill shares the top dos and don’ts when it comes to pensions
Do seek professional help when considering a pension investment
Pensions can be a minefield and a qualified financial adviser will help you to plan out your pension by looking at your situation, your attitude towards risk, and give impartial advice on the possible pension strategies that work best for you.
If you are a PAYE employee, pension contributions can be made regularly and easily through your weekly/monthly pay.
A financial adviser will help you decide which fund to contribute to and how much to put in based on your own circumstances.
Don’t wait until late in life to start a pension
Personal circumstances are constantly changing and if you are earning a nice wage in your late 20s/early 30s, you should be contributing to your pension for the future.
Why? By the time you’re in your mid to late 30s, you will have children running around asking for money for school trips or new runners and you won’t have that spare cash to also contribute to your pension.
Smart planning is half the battle and if you only put €200/month into a personal retirement fund from 25 years of age until you retire at 68 you will have accumulated €151,364 in a low-risk fund after only contributing €103,200. This would allow for €437/month of a pension on top of your State pension when you retire.
The advantage of starting young is that it’s human nature to be more risky in our youth and this allows us to take chances by investing in higher-risk pensions, which may give us a larger return.
Do think about the tax saving incentives
Another thing people always forget about when considering a pension is the tax saving side of it.
Take my example above of contributing €200/month to a pension. If you are in the 40% tax bracket, this will really only cost you €120/month based on your tax saving or if you are in the lower 20% tax bracket it would cost you €160.
I know if I was offered a saving of €40-80 per month, I’d be taking someone’s hand off for it.
Don’t underestimate the value of your employer contributing
From 2024, employees will have access to a workplace pension savings scheme that will be co-funded by their employer and the Government.
This is a voluntary option but it is an “opt-out” system rather than opt in. If you stay on this system, you will have your contributions matched one-for-one by your employer. This means for every €3 you contribute, a further €3 will be contributed by your employer and €1 by the State.
In 2024 employer and employee contributions will start at 1.5%. They will increase by 1.5% every three years until they eventually reach 6% by 2034.
Do review your pension status
For someone under the age of 30, the max you can contribute to your pension is 15% of your salary.
When you’re in the 30-39 bracket, this rises to 20% and people over the age of 60 can contribute up to 40% to their pension and get tax relief based on this.
This may seem straightforward, but if you just set your pension contribution and forget about it you may be missing out on large tax savings as well as the opportunity to adjust your pension for the better.
Reviewing your pension involves sitting down with a professional and calculating how is your fund doing, should it be moved to a different fund and should your contributions be adjusted up or down based on personal circumstances.
Lots of people think pensions are confusing and don’t see the benefits in them, however, with a bit of advice from someone in the field, it could set you up for life and put some stability on your future plans.
In terms of the cost of a good professional adviser, I could almost guarantee you’d make the tax saving in the first year after speaking to them depending on your situation.
People are specialised in different fields for a reason and in this case, a financial adviser would be your go-to for the best advice personally.
Jerry O’Neill is an ACCA qualified accountant working as an agricultural consultant with Brady Group Agricultural Consultants and Land Agents.