If you are an employee, your employer may set up a pension as a benefit. Your employer usually sets up the rules of the scheme. You don’t pay tax on your contributions; your employer automatically takes them from your salary, before working out income tax on your remaining income.
The main advantage of this is that your employer must make a contribution, no matter how small. However if you are paying into a Personal Retirement Savings Account (PRSA), your employer does not have to make a contribution.
How much income will you have on retirement?
The income you get when you retire depends on whether your employer scheme is a defined benefit scheme or a defined contribution scheme.
Defined benefit scheme
This pension plan occurs when an employer or sponsor promises a specified pension payment, lump-sum or combination on retirement.
It is predetermined by a formula based on the employee’s earnings history, tenure of service and age, rather than depending directly on individual investment returns.
Traditionally, many governmental and public entities, as well as many corporations, provided defined benefit plans, sometimes as a means of compensating workers in lieu of increased pay.
A defined benefit plan is ‘defined’ because the benefit formula is known in advance.
For example, you might get a maximum of half your salary or two-thirds of your salary after 40 years’ service, including the state pension.
With this type of scheme, you can predict your pension income, based on your salary and years of service.
However, there is no guarantee that your defined benefit scheme will not be changed to a defined contribution scheme by your employer in the future and this would affect the benefits you will get.
Defined contribution scheme
Under this type of pension you are not promised a percentage of your final salary when you retire. Instead, your pension income depends on the value of your pension fund when you retire and the annuity rates at the time. In defined contribution plans, future benefits fluctuate on the basis of investment earnings. Under this type of plan, the employee contributes a predetermined portion of their earnings to an individual account, all or part of which is matched by the employer. The value of your pension fund depends on:
The value of the contributions paid in by you and your employer.The investment performance of the pension fund.The amount of fees and charges the pension investment company applies.Most employer schemes, all personal pension plans and PRSAs are now set up as defined contribution plans, meaning only the final value of your pension can be estimated. When you retire, your pension may be less than you expected. You need to examine the benefit statement that you receive each year from the trustees and regularly review your contributions.
Your employer’s scheme may allow you to make Additional Voluntary Contributions (AVCs), or buy back missing years, called Notional Service Purchase (NSP) if you are in the public service, through the group pension plan.
If you are an employee, your employer may set up a pension as a benefit. Your employer usually sets up the rules of the scheme. You don’t pay tax on your contributions; your employer automatically takes them from your salary, before working out income tax on your remaining income.
The main advantage of this is that your employer must make a contribution, no matter how small. However if you are paying into a Personal Retirement Savings Account (PRSA), your employer does not have to make a contribution.
How much income will you have on retirement?
The income you get when you retire depends on whether your employer scheme is a defined benefit scheme or a defined contribution scheme.
Defined benefit scheme
This pension plan occurs when an employer or sponsor promises a specified pension payment, lump-sum or combination on retirement.
It is predetermined by a formula based on the employee’s earnings history, tenure of service and age, rather than depending directly on individual investment returns.
Traditionally, many governmental and public entities, as well as many corporations, provided defined benefit plans, sometimes as a means of compensating workers in lieu of increased pay.
A defined benefit plan is ‘defined’ because the benefit formula is known in advance.
For example, you might get a maximum of half your salary or two-thirds of your salary after 40 years’ service, including the state pension.
With this type of scheme, you can predict your pension income, based on your salary and years of service.
However, there is no guarantee that your defined benefit scheme will not be changed to a defined contribution scheme by your employer in the future and this would affect the benefits you will get.
Defined contribution scheme
Under this type of pension you are not promised a percentage of your final salary when you retire. Instead, your pension income depends on the value of your pension fund when you retire and the annuity rates at the time. In defined contribution plans, future benefits fluctuate on the basis of investment earnings. Under this type of plan, the employee contributes a predetermined portion of their earnings to an individual account, all or part of which is matched by the employer. The value of your pension fund depends on:
The value of the contributions paid in by you and your employer.The investment performance of the pension fund.The amount of fees and charges the pension investment company applies.Most employer schemes, all personal pension plans and PRSAs are now set up as defined contribution plans, meaning only the final value of your pension can be estimated. When you retire, your pension may be less than you expected. You need to examine the benefit statement that you receive each year from the trustees and regularly review your contributions.
Your employer’s scheme may allow you to make Additional Voluntary Contributions (AVCs), or buy back missing years, called Notional Service Purchase (NSP) if you are in the public service, through the group pension plan.
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