The following article appears as written by Pat Leahy, Infinity Financial Planning Ltd, in the Irish Examiner on 16.10.2015. For further information email Pat Leahy: firstname.lastname@example.org
There are 5 TAX advantages to a personal pension plan. Firstly, Income Tax Relief (Subject to Revenue Limits) is provided at your marginal rate of tax on contributions. Therefore, if you are top rate tax payer for every €4 you get €2.67. This compares favourably with the now redundant SSIA of for every €4 you got €1. Secondly, as your contributions accumulate in your fund there is no tax on any growth i.e no DIRT or CGT. In addition, the austerity levy on pension funds no longer apply from 2016. Next, is the advantage of the tax free cash option on retirement, capped at €200,000. The fourth tax advantage is the Approved Retirement Fund (ARF) as a post retirement tax planning tool which allows you minimise or perhaps even eliminate your tax in retirement. The final tax advantage to highlight is the Tax Free Death Benefits, Capital Acquisition Tax may apply depending on the beneficiary and the thresholds.
So let’s focus on how this works.
How much do you need? With the help of a trusted advisor put together a game plan. Try the analytical process. Compare what your income is now, and what it will be. Decide on a target income in retirement. Determine what resources are available to meet your goals. Calculate the contribution required to reach this target income in retirement. Investigate if new overall contribution is within your personal tax relief limit (If a Personal Pension) or within the maximum funding limits (if an Executive/Directors Pension). Then take the first step rather than focusing on the daunting goal of a massive fund size. To give an example of a personal pension contribution: €130p.w + Tax Relief + Tax Free Growth + Compound Interest + 20 years = €400,000.
Yes, there are some guesses and variables involved in the outcome. This is the case for both where you end up personally and what your fund value amounts to. Importantly, make a guess, take action and review regularly and amend accordingly. The menu of investment options can be daunting. A rule of thumb is to allocate your investment strategy dependent on your stage in life.
In conclusion, remember WHY do you need a pension plan? It’s not any more complicated than a savings plan for retirement. The AIM is to build a saving plan so you can afford to retire in the lifestyle you desire. Finally, to paraphrase Bill Schultheis, build a pension plan, ignore Wall Street and financial pornography, and get on with enjoying your life.
Pat acts as an independent pension and investment broker providing a financial education, planning and analysis service to individuals, affinity groups and corporates and is based in Cork City. For further information contact Pat Leahy via email email@example.com