You would not be alone in underestimating what needs to be put away to provide an income in retirement. Bear in mind, most people consider 65 a normal retirement age, but for many, 68 will be the normal State pension date – have you thought about how you might bridge this gap?

Planning for retirement is now more important than ever. Longer life expectancies and earlier retirement ages mean that many of us will spend up to a third of our lives in retirement. Retirement planning is crucial to help you maintain your current standard of living during retirement.

The current state pension is at €230.30 per week – could you live on the equivalent of €11,976 per year? It is never too late to start a pension, but the earlier you start the more you will save.

Pension contributions in the early years can grow significantly and the power of compounding growth can make for improved pension funding in later years.

The good news is that you can claim full income tax relief at your marginal rate on the contributions you put into a Personal Pension Plan or Personal Retirement Savings Account (PRSA).

This tax relief makes it a very cost-effective way to save. The maximum pension contributions, in any one year, for which you are entitled to tax relief, is related to your age and is expressed as a percentage of your gross income. The percentage relief limits are detailed in Figure 1.

Flexibility

Consider a plan with contribution flexibility so you are free to increase, reduce or freeze your contributions to suit your own personal circumstances as they change and only make a pension contribution if you have an income tax liability to offset.

There is no point making pension contributions with after-tax income or going over the personal limits. The maximum gross income figure for relief purposes is €115,000.

Pension investments roll up free of tax so this gives them the potential to earn higher investment returns than similar investments that are subject to tax.

Deciding how and where to invest your funds is a complicated business and, today more than ever before, the almost unlimited choice of complex financial instruments being offered to investors by an equally unlimited list of financial institutions has left many confused.

Investment strategy

Some want the choice to manage their pension fund personally while others recognise the benefit of having some or all of their assets managed for them.

As part of any investment strategy, your advisor should work with you to determine the goals you are trying to achieve, your investment knowledge and experience, and your financial situation.

Having received tax relief on your contributions and tax-free investment growth, the fact that you can then take up to 25% of your fund tax-free at retirement, subject to limits, is another excellent incentive to take out a Personal Pension/PRSA.

Depending on your circumstances, investing the proceeds of your Pension Plan in an Approved Retirement Fund (ARF) can be a very tax-effective way of passing on money to your dependants.

So even if you feel that you will have other sources of income when you retire, a Personal Pension Plan/PRSA can still be a very effective way of putting money aside.

Go for personalised and independent investment and pension advice with a focus specifically on your attitude to risk, your investment goals and your investment term.