Making up for lost time: planning your pension

Most people spend the early part of their careers saving for homes and providing for their families. Pension planning tends to take a back seat to the baby seat. In many cases, people are well into their 40s before they can even consider making meaningful contributions to a pension plan.

Pensions Focus looks at all aspects of the rapidly evolving Irish pensions market, from green pension funds to auto-enrolment delays and the introduction of master trusts, and highlights the critical importance of starting early on the retirement savings journey.

[ The Irish Times ePaper ]

So what to do to make up for lost time? Lots. Firstly, like the one about God and the guy who wants to win the Lotto, get started. If your company has an occupational pension scheme, and is generous enough to match, or exceed, your contributions, then make the most of it. Consider it as tax-free salary that will help you catch up quicker.

If you are self-employed and don’t have a personal pension, get one. If you work for a company that doesn’t offer an occupational pension scheme, get a personal retirement savings account (PRSA), and start contributing to benefit from tax reliefs.

Remember, you can only claim tax relief on contributions against this year’s income, or last year’s income. With pensions, it’s a case of use it or lose it, so use it.

Voluntary contributions

If you are a member of an occupational pension scheme in the public or private sector you can pay additional voluntary contributions (AVCs).

These are a defined contribution pension arrangement provided for your scheme, usually by an insurance company. You can choose the rate at which to contribute to an AVC, subject to a maximum rate determined by Revenue, and AVCs attract tax relief too, subject to Revenue limits.

Check if the rules of your particular scheme permit AVCs to be made. If not, your employer must make a standard PRSA available, either as part of the existing occupational pension scheme, or as a separate AVC scheme.

If you make AVCs, then your benefits will be subject to the rules of your scheme and the Revenue limits applying to occupational pension schemes.

‘Buying back’ years

Most civil and public servants, who will have less than the maximum 40 years’ service at retirement, can make additional contributions to purchase additional years of service under their public sector scheme. Called purchase of notional service (PNS), it’s more commonly referred to as “buying back” years.

The PNS scheme is operated by public service employers such as Government departments, local authorities and State agencies, for public service employees such as teachers, nurses, gardaí and civil and public servants.

Payment may be by lump sum, or periodic deductions from pay. Purchase rates vary depending on the age at commencement of purchase and contributions are normally allowable against income tax, subject to the Revenue limits on pension contributions. Your employer should be able to make these deductions at source. Channelling pay increments into them automatically can take the sting out of it – you won’t miss what you never had.

Occupational schemes

A small number of funded occupational pension schemes, primarily in the commercial semi-State sector, operate a similar facility, commonly referred to as “added years”. Check with your HR department to find out what the cost of buying back or adding years would be.

Finally, get professional advice to help you maximise, and optimise, what you’ve got. It could make a huge difference to income in retirement.

“Most people don’t have one pension pot now, they have a few. I had one client who had 21 – and no investment strategy,” says Brian Kingston, retirement and financial planning manager at Brewin Dolphin Ireland.

“The main thing is that you actually have to do this, and the earlier you do it the better. Too many long-finger it because they have family and then kids to send to college and, the next you know, you are in your 50s and trying to save for retirement.”