Am I not entitled to a State Pension when I retire?
Yes, you are. A State Pension is payable from the age of 66 to those who have paid the required PRSI contributions throughout their working lives. However, the State Pension will only pay for the basics.
The State Pension is a maximum of €277.30 per week. This is equivalent to €1,205 per month or €14,460 per year.
The State Pension. will only replace 18% of a €80,000 salary at retirement. The effect is more pronounced at higher salary levels. The State Pension replaces only 12% of a salary of €120,000 at retirement. We need our own additional retirement savings to fill the gap.
It is worth pointing out that usually we will not need 100% replacement of our salary for retirement. This is because a lot of our expenses - e.g. mortgage payments - have rolled off by then. The replacement % is individual. AM Financial can help you figure out what % of your salary you will need in your retirement years.
Is a pension the only way I can save for my retirement?
There are other ways to generate income in retirement - deposit account interest, interest from bonds, dividends from shares or, once a big discussion topic here in Ireland, rental income from investment properties. Another possibility is relying on the family home - downsizing to create a nest egg for retirement. We may also choose to continue to work reduced hours in retirement.
However, the substantial tax benefits that accompany saving for retirement through a pension make it a very attractive option.
What are the tax benefits of saving through a pension?
1. Tax Relief on Contributions
Personal contributions are deductible against salary for income tax. What does this mean? Well, assuming you are in the 40% income tax bracket, you have a choice of taking €600 in after-tax income or investing €1,000 into a pension savings plan.
There is a natural reluctance to give up income now for income later. But when the differential is this big, it makes a lot of sense !
2. Tax-Free Investment Return
All savings invested in a pension are exempted from income tax, DIRT and capital gains tax. This helps give your pension the snowball effect. Small amounts contributed now can grow into very large amounts when they come back to you.
3. Tax-Free Lump Sum at Retirement
When it comes to retirement, it is possible to take a lump sum of €200,000 tax-free. That's quite a few sun holidays.
Sounds good - but I don't know if I can spare the money to save now !
Sometimes money is tight and we all know that feeling. Still though : it is such a shame to miss out on the tax benefits available here. These kind of opportunities are rare. Even a small amount saved every month can snowball into quite a decent pension pot.
At AM Financial we can help you figure out what level of savings might be possible in your budget. We will help you figure out how big your pension savings will need to be to get you the income you need in retirement.
It is also possible to switch on and off your pension savings as you like. So there's no excuse - come and talk to us !