Why do I have a pension?
There will be a day in everybody’s life where they ‘down tools’ and retire. After this date you will no longer receive an income.
The loss of income is substituted for the state pension for those who are eligible. The state currently provides two types of pensions for retirees:
The State Pension (Contributory) is payable at age 66 to individuals who have met the required PRSI contributions. It is worth noting that the age has increased to 67 from 2021 and 68 from 2028. The maximum personal rate is €248.30 per week (€12,911.6 per annum).
State Pension (Non-Contributory) is payable at 66 to individuals who have not met the required PRSI contributions however eligibility is subject to a means test. The age has also increased on this state pension too (age 67 from 2021, age 68 from 2028). The maximum personal rate is €237 per week (€12,324 per annum).
This will be a significant reduction in income for most people, so one option to help make up the shortfall in lost income, is to consider making contributions into a private pension. Pensions can also provide protection in the form of a lump sum or payments out to dependents in the event of death. Furthermore, the state offer tax relief on pension contributions in order to encourage people to save.
It is also worth noting that the state pension is not guaranteed and many commentators question whether it will be available in the future, as it will be put under increasing pressure due to an ageing population. The recent increases in age it will become payable are an indicator of this.
When can I access my pension?
This will depend on what sort of pension structure your funds are invested in as there are differing rules pertaining to each type of pension.
The earliest you can access your pension fund:
- Occupational pension scheme – age 50
- Buy Out Bond / Personal Retirement Bond – age 50
- PRSA - age 60 (this can be reduced when you are leaving employed service)
- Personal Pensions – age 60
Early retirement is when somebody takes their pension benefits from their pension plan before they have reached their normal retirement age. You can use these funds to help top up salary if you are still working, but doing less hours or if you want to retire completely.
Due consideration should be taken to ensure this is the right decision for you and should be done in conjunction with a financial advisor. They will be able to put you through a financial planning process to ensure that you will have enough financial provisions to live comfortably in retirement without the financial woes and stresses of working life.
Occupational pension schemes generally require the consent of the employer or the trustees of the pension scheme to take benefits early.
Private pensions do not need consent of an employer and can be taken early in line with the conditions of the contract.
Pension Rule for Professional Sportspeople
It is recognised that most professional sportspeople have a much shorter career than most other professions. The revenue has taken this into account and allow increased personal tax relief on pension contributions.
As per the revenue’s pension guidelines, sportspeople can access their Retirement Annuity Contract (RAC) or Personal Retirement Savings Account (PRSA) at any time when they become ‘permanently incapable through infirmity of mind or body of carrying on his or her own occupation or any occupation of a similar nature for which he or she is trained or fitted’.
Where a sportsperson has an employer scheme, it should be possible to access benefits following a serious career ending injury.
Professional sportspeople can access their pensions from 50 onwards however this may be ill advised from a financial planning point of view and should be discussed with a financial advisor.
Pension Rule for Ill health
Ill health may make it impossible for you to go back to work. In this case you may be able to access your pension benefits early to provide you with an income while you are ill.
The same rule that applies to sportspeople applies in the case of ill health, whereby if you suffer from physical or mental deterioration which is serious enough to prevent you from carrying out your normal employment or which seriously impairs your earning capacity, then again, you may be able to access your pension benefits early.
It may be advantageous to take early retirement through ill health if you are a member of an occupational pension scheme which allows you to take the full benefit now, than you would be entitled to at normal retirement age. Not all schemes have these terms so it is worth speaking with a financial advisor.
On the other hand, if you are a member of a defined contribution scheme and are forced to take early retirement through ill health, you may be seriously reducing the annual income you can receive from your pension.
What is pension liberation?
As the name suggests, pension liberation involves “liberating” your pension funds by unlocking access to them earlier than normally allowed.
By law, individuals cannot access their pension pots until at least 50 years of age in the case of occupational schemes* and 60 in Persona Retirement Savings Accounts and Retirement Annuity Contracts. There are however some firms which target financially struggling families and offer early access to pension by exporting them to another country where they can access their funds earlier than normal.
*You need to either have left or leave service to access any retained or accrued pension benefits.
These spurious schemes should be avoided as the Revenue have strict rules about getting early access to pension benefits and most people who avail of these services often end up with nothing.
Always consult with a reputable financial advice firm and do not be blinded by the short-sighted promise of unlocking your pension funds early.
Should I take early retirement?
It is important to think carefully about how you will manage financially and emotionally before deciding to take early retirement, which can in some cases be as much as 15 years earlier than the original retirement age of the scheme.
You are more likely to receive a smaller pension than you would have accumulated if you worked until normal retirement age. You will also not be entitled to the state pension straight away as this will only become payable from at least age 66. You will need to plan out your retirement and make accurate calculations of what income you will actually require to meet your expected expenditure. This is can be quite complicated when you take into account inflation, expected growth rates, change in expenditure throughout your lifecycle, and other unexpected costs need to be taken into account such as long-term care.
Without doubt, such a process is far too complicated to carry out with a pen and paper and a financial plan should be created in conjunction with a lifestyle financial planner who specialises in this area. These planners can take you through a process that is known as cash flow modelling. They use software which can input all the expected inflows (income) and outflows (expenditure) which creates a picture of your finances through your lifetime.
Cash flow forecasting allows you to reflect on your current financial position relative to your preferred position. This enables you to make provision or take action now to ensure you achieve your personal aspirations in the future.
The software coupled with an expert financial advisor and planner also allows different scenarios to be run to ensure you will have enough funds for all eventualities.
Am I prepared emotionally for early retirement?
This is a massive transition as people are faced with a lot of spare time which they are not used to and can find themselves feeling lost with no purpose. Many individuals define themselves by their career and without this can feel inadequate. There can also be a loss of social interaction as there is a loss in the friendships which have been forged through work. It is a good idea to speak with others before deciding to take early retirement to put some plans in place to ensure a successful passage into retirement. There are bodies such as the Retirement Planning Council of Ireland who can also be consulted.
Want to find out more about early retirement planning?
Contact us if you would like to discuss your retirement plan to ensure you are on the right track to your desired lifestyle in retirement.