Pensions… Its like saving for a 20 year holiday

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Cast yourself forward, it’s June, your heading on holidays somewhere lovely and sunny for two weeks with the family, or perhaps just the two of you. You’ve probably started saving for it for a few weeks or months before hand. A few Euro here and there so to speak. You picture the sun, the sea and the vino and tapas. Most of can save a few euro for a holiday or special occasion yet we know our income will drop in retirement but few are adequately prepared.
It never ceases to amaze me though, at 67/68 for most people you will be retiring from work and given the recent male and female mortality rate being 85 and 88 respectively, this means you will in most cases 20 years of not working. The state pension at present is 230.30 per week and currently it’s not means tested. By the time we reach 68, how much of a state pension to you guess there will be available to us.
Let’s speak ‘real world’ figures. If you’re currently earning 35,000 per year, in your early 40’s, then at 68 years old one Monday morning your income will drop from 35,000 to 11,975.60 for the next 20 ‘ish years. That’s a massive gap in income. This gap gets worse obviously the higher your salary is. The answer we hear most often when we speak to our clients about this is, ” sure I’ll be grand, I’ll down size my house and get somewhere smaller” or ” sure my business/premises is my pension…”. Both valid arguments but why should you have to down size or have to sell asserts to realize a nice comfortable standard of living.
Let’s talk about the nuts and bolts of pensions.
Pensions are now, and always have been a by tax efficient way of saving for your retirement.
Tax relief on the way in:
A 20% tax payer will get 20% tax relief on anything they pay into a pension. So for every 100 you pay into a pension, you get 20 tax relief. It gets better if you pay 41% tax! Then you get back 41 in every 100 paid into your pension.
Investments grow tax free:
Any growth on your pension fund is tax free. Compare that with a savings account in a bank or credit union. If you put 1000 in your pension and it makes 10%, then that 100 that your fund has made it tax free. If on the other hand you have 1000 in a savings account and it makes the same 10%, then that 100 is liable to a whopping 41% DIRT tax.
Tax free cash on the way out:
When you reach your retirement age, you can access your funds. The amount that you can take out tax free varies from personal pensions to company pension. For personal pensions you can take away 25% of the fund as a tax free lump sum (subject to a max of 200,000). If you’re a company employee or a company director, you can take out 150% of whatever your salary would be at retirement. (Max limit subject to 20 years service with the company). So in practice, if an employee had 100,000 in their pension fund, and salary was calculated at 70,000 and they had 20 years service, they could take the entire pension pot tax free.
Investment choice:
Let’s not run away with our selves just yet though. Lest we forget the lessons of the past. In 2008 a lot of people lost a lot of money in ‘pension fund’. However, since early 2009 most equity funds have recovered. Look at the standard life GARS fund. It has a 5 year performance figure of 6.8% per annum. * 30th September 2014 Q3 figures. The industry has reacted to events of the past and come with many different and effective ways to deal with market ‘corrections’. One such way is by auto rebalancing. A fund may start off as a medium risk fund but through time and market fluctuations will cause it to move to a different risk category thus exposing the investor (you) to financial risk that you may not have signed up for. Auto rebalancing forces the fund manager to correct this and always keep you in the risk category that you initially agreed to. Every client should fill out a risk profile questionnaire to establish the risk profile that best suits them it will provide them with a number between 1-7, with 7 being the most risky. This is not just an initial thing, it should be carried out on a regular basis by your financial advisor to make sure the fund is best suited to you, because as we get older our attitude to risk will shift. Funding for pensions is a vital part of financial planning and regular meetings at least twice yearly are advised.
For those who tell me that they bought houses or commercial units and that’s their pension. To them I reply, did you know that your pension fund can purchase a residential unit or commercial unit, (certain revenue rules apply to this) all rent received on that unit is tax free, and when you dispose of the property, there is no capital gains tax applied. So you purchased a property for 100,000 and sell it for 200,000 the your liable for the gain in profits of 33% of 100,000. If your pension buys it, the full 200,000 hits your pension pot.
We here at Christy McGee insurances ltd have been advising on pensions from the early 90’s and we’re still here. We can advise you on your existing pension fund or speak to you in relation to starting one. It’s free to talk to us, so it can’t hurt. So let us help you develop your 20 year holiday dreams, speak to Dave today at 042 93 39337 or dave@christymcgee.com. Why not check out or web site at www.christymcgee.com