Pensions can be complicated due to the rules and jargon associated with them; the differences between personal and occupational pensions, the rules associated with the retirement benefits, how much you can contribute to your pension and receive tax relief etc. However, the rationale for starting a pension is simple, a pension enables you to save for your retirement in a tax efficient manner.
Ireland’s State Pension (Contributory) stands at just over €265 per week. The is less than half the current average industrial weekly wage. Considering this and your required income in retirement, there is a very good chance that you will need to have an additional source of income in retirement and a pension can provide you with this income.
From an individual’s perspective
When you contribute to a pension, you are making an initial saving by getting tax relief at your marginal rate of income tax, e.g., for someone on the higher rate of income tax who wants to contribute €100 to their pension, it will cost them €60 as they will receive tax relief of €40.
The value of the contributions that you make can be enhanced by investing in suitable investment funds over the term of your pension. The investment growth that is achieved within a pension is tax-free. This is where the element of risk comes into pensions. Ideally, a pension investor should take advantage of the tax-free investment growth within their pension so they can maximise the value of their pension fund at retirement. However, investors will have varying risk profiles and it is important that a pension investor is aware of the risk profile of their pension. The pension investment portfolio should be reviewed periodically to ensure the investments remain suitable.
From an employer’s perspective
While it remains to be seen when exactly auto-enrolment will be introduced in Ireland, employers can use occupational pensions to provide employee benefits on their own terms at any point. An Employer can establish an occupational pension scheme for its employees in a cost-effective manner and receive corporate tax relief on the contributions it makes to the scheme.
Where an employer is looking to maximise the pension contributions made to the pensions of certain employees, a change in legislation for personal retirement savings accounts (PRSAs) that came into effect this year has opened new funding opportunities. Following this change, there are no Revenue limits on the maximum benefits that an employer can provide to the employee, subject to the standard fund threshold (SFT) of €2 million (SFT is the maximum tax relieved pension funds from all sources at retirement).