You’re married, have a mortgage, maybe you have kids, but nothing shows greater commitment than planning your retirement together. This isn’t just romantic, it’s highly practical.
Gaming things to make the most of your tax relief, employer contributions and any age difference can really affect your comfort in your later years together. If you are going to stick together then a joint approach to pension planning can really pay off.
Employer contribution
With so many competing priorities for your money, you want to make sure any pension contributions you can make are giving you the biggest bang for your buck. It pays to look at where your pooled money is going to have the biggest impact.
Many employers offer matching pension contributions – so if you contribute 4 per cent of your gross salary for example, they will contribute the equivalent of 8 per cent from their own coffers. This is free money, so avail of the maximum employer contribution if you can.
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“It’s part of your overall total compensation for your job, so it’s important not to leave any money on the table,” says Tessa Hayes, employee benefits consultant at NFP.
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Ideally, you both want to be availing of the maximum matching employer contribution. But if your household’s capacity is limited, and if one employer is offering a super-duper matching scheme, then it can pay for a couple to prioritise contributions to this pension, Hayes says.
Doing this can garner your household more free money.
Tax relief
There is tax relief on pension contributions – more free money, and the relief is most generous for higher earners.
Those earning €44,000 a year or more, benefit from 40 per cent tax relief on pension contributions. So, for example, if you put €100 into your pension then the full €100 goes into your pot, where it can grow and compound tax-free, and the Government will give you €40 back. That €100 contribution only costs you €60.
Lower-rate tax payers, however, only get 20 per cent tax relief on contributions.
“If your husband is earning €30,000 a year, that €100 contribution to pension is actually costing them €80,” Hayes says.
That’s not to say a spouse earning less shouldn’t contribute to a pension, but a couple committed to spending their retirement together might wish to play tax reliefs to their advantage.
Age
Is your spouse older than you? There are limits to the amount of pension contributions you can get tax relief on in one year based on your age.
If your spouse has crossed the threshold of a round-year birthday into the next decade for example, and you have not, their pension contributions can qualify for more tax relief.
In your 30s, you can get tax relief on up to 20 per cent of your earnings. In your 40s this rises to 25 per cent. Between the ages 50 to 54 you can get relief on 30 per cent of your earnings. From the age of 55 to 59 this rises to 35 per cent and to 40 per cent for those aged 60 and over.
So, for example, if your spouse is aged 42 then they are entitled to get tax relief on contributions of up to 25 per cent of their income. That means someone earning €80,000 can get tax relief on annual pension contributions up to €20,000.
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If they are a higher-rate taxpayer then the tax relief is 40 per cent. So if they contribute the full 25 per cent of their income then €20,000 will go into their pension, but it will only cost them €12,000 as they will get €8,000, or 40 per cent, back from the Government.
If you are aged 38 and earning the same amount, you can get tax relief on just 20 per cent of your €80,000 earnings. Contribute €20,000 just like your spouse, and your contribution will cost you €13,600 as you’ll only get €6,400 back. That’s a €1,600 difference.
Similarly, if your spouse is aged 55 and you are aged 48 then they can get tax relief on 35 per cent of their earnings while you will get tax relief on 25 per cent.
Few people will be in a position to contribute either 25 per cent or 35 per cent of their income in a single year, but in a bumper year it can pay to prioritise contributing to the pension of the older person.
Time out
Periods out of full-time paid work are common.
In general, if you are a member of a work pension scheme and your salary continues during maternity leave then pension contributions continue as normal. With extended maternity leave or parental leave, an employer is not obliged to make contributions.
Those on parental leave can mitigate the loss by continuing to contribute if they can afford it. Consider making even reduced contributions if you can.
Generally, you cannot get tax relief on pension contributions if you have no employment or taxable earnings.
For that reason, it can make sense to prioritise contributions to the working spouse’s pension, where Government tax relief and matching contributions can be claimed.
“This is where retirement planning is an overall household objective; you are not looking at it as two separate pots,” Hayes says.
“During one spouse’s time out of work, the other spouse could temporarily increase their contributions to offset where their partner isn’t funding a pension. Perhaps they can look at maximising their tax relief.
“That will help you to maintain your overall retirement plan, but of course moving down to a one-income household can also add its own pressures, so you have to look at the full picture.”
Someone planning to take time out of paid employment could decide to buffer their pension in advance, she says.
“You could consider increasing your pension contributions before you go and increasing them or doing an AVC [additional voluntary contribution] to catch up,” Hayes says.
Taking leave from paid work or working part time will affect the number of PRSI credits you need to qualify for the State pension.
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You get these credits while on maternity leave. You’ll get them if you take parent’s leave and qualify for parent’s benefit and if you take parental leave.
Your employer must, however, write to the Department of Social Protection, setting out the weeks you have not worked.
If you take carer’s leave and qualify for carer’s benefit then you also get credits automatically.
It’s worth checking with the Department of Social Protection that you have sufficient contributions to qualify for the State pension.
If one of you is not in paid work then be realistic about what your spouse’s pension can provide. Ensure you understand the pension and get involved in decisions about it, particularly at drawdown, as this will impact your financial security for the rest of your lives.
If the pension is in accumulation phase and the earner dies then the value should go to the spouse. If the main earner has already retired and dies then what happens to their pension depends on how they took their benefits on retiring. If they bought an annuity then the pension may die with the earner.
If the main earner sets up an approved retirement fund (ARF) then this can be transferred to a spouse’s name on the earner’s death.
How much?
How much income will a couple need in retirement? It can be hard to put a figure on that, but having a target in mind can help you get there.
“It’s about asking, ‘What does retirement mean for us?’,” says Kate O’Flaherty, a certified financial planner with Ollie Moran Financial Services.
“For some couples, it will be two or three cruises a year. Others will just want to down tools, go for a walk every day and read. Everyone is different.”
The maximum State pension is €299.30 a week, or about €15,566 annually, for those under age 80.
To enjoy a “modest” standard of living, a couple would need a retirement income of €28,800 a year, a 2024 report for the Pensions Council by KPMG said.
Couples wanting a “comfortable” standard of living should aim for €43,200 a year. “Comfortable” means a bit more financial freedom, some travel and discretionary spending, but still not an affluent lifestyle.
If you both qualify for a full State pension, this will reduce the amount you need to self-fund to about €12,000 a year.
By 2046, Irish men can expect to live to 85 and women to 89. So if you retire at 66 then you’ll have to fund about 20 to 25 years of living after your last pay cheques.
If you decide to take your pot as an annuity – that’s a guaranteed income every year – a couple entitled to the full State pension will need a pot of about €276,000.
With an annuity, however, if you die then the pension dies with you. Your spouse doesn’t get it.
An alternative is an ARF. This is where you control your retirement fund and can invest it in a wide range of investment funds. You can also make withdrawals when you need them. And because you own your fund you can leave it to your dependants when you die.
When to retire
At what age do you both plan to retire? If it’s sooner than 66 then you will need to bridge the gap, O’Flaherty says. Accessing your pensions early can have tax implications, too.
In retirement, you can take up to 25 per cent of your fund as a tax-free lump sum, capped at €200,000. The remainder is used to buy an annuity or is moved into an ARF.
“There is a personal tax-free threshold, but, unlike tax credits, this can’t be transferred between spouses, so it’s really important to structure both of your pensions as well as possible,” she says.
It’s likely couples will have one or more inactive pensions from old jobs. This money can often be accessed from the age of 50. Couples might be earmarking this for college costs or clearing the mortgage.
But once you move a portion of your pension into an ARF, Revenue forces you to withdraw at least 4 per cent of your fund’s value annually from the year you turn 61, even if you don’t need the money. This rises to 5 per cent from age 71.
Even if you don’t take the money out of the fund, Revenue treats this amount as an actual withdrawal and the mandatory 4 per cent is added to your annual income and is fully subject to income tax, USC and PRSI. This can result in a higher tax burden.
“You could still be earning good money in your job in your early 60s, so you could end up paying way too much tax,” O’Flaherty says.
Discuss what other sources of money there might be, too.
“Inheritances are now being received in your 60s when you are on the verge of retirement. That money could go towards the mortgage,” she says.
Start talking about pension and saving for it as early as possible even if amounts are small, O’Flaherty says. “The earlier you start, the longer you will be invested and you will get the benefit of compounding interest over time.”
