Starting a Pension in Ireland - The Ultimate Guide
Starting a pension in Ireland is a great way to reduce the tax you pay on your income while also saving for your retirement.
Why not check out our free start a pension interactive tool? The tool provides you with all the information you need to get started without the usual jargon.
In just a few minutes you’ll know about the state pension, why you should start a pension, tax relief on pensions and how to get started.
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Starting a Pension in Ireland
If you are thinking about starting a pension in Ireland then this article is full of useful information that will help you get started.
As the guide is quite detailed we have created the start a pension tool to guide you through the information you need based on your requirements.
Tax Relief on Pension Contributions
Pension Contribution Calculator
Our free start a pension tool will provide an indication of your tax free pension contribution limits based on your age and income.
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Section 1:
Pension Basics
Introduction to Starting a Pension in Ireland
What is a Pension?
A pension is just a savings account that you use to save for retirement. There are special rules attached to these accounts for tax and access purposes and this is what makes them different from a normal savings account.
We will look at this in more detail below but first, let’s start by taking a look at why you might want to set up a pension in the first place.
To understand why starting a pension is important we must first look at the State Pension. The State Pension is a pension that you accumulate by paying PRSI or Pay Related Social Insurance in Ireland each time you receive your salary. If you have made enough contributions once you retire, the state then gives you a small weekly sum to live off around €39.40 per day.
The State Pension in Ireland is around €275.00 a week. You are probably looking forward to retirement and plan to travel, live abroad, or do the things you have always wanted to do. In retirement you will have the time to do these things, but will you be able to afford it?
If you think you would need more than €39.40 a day to live comfortably and pay your bills then you need to top up your income in retirement by starting a pension.
You probably already knew that setting up a pension was a good idea before you got here. Since then the thought of living on just €39.40 a day in retirement has more than likely opened your eyes to the importance of having a pension.
You have probably already answered the question…should I start a pension? If not there are even more reasons why starting a pension now makes sense. The earlier you start saving for your retirement the better. This is because your money has more time to grow. If you start early you need to put less money into your pension overall which translates to real savings for you.
Take a look at the graph below to see how a pension fund grows over time. It is very easy to see the benefit of starting a pension early from this graph. Someone who starts their pension at age 20 could expect their fund to have more than quadrupled in size by the time they retire.
This is why now is always the right time to start a pension, even if you can only afford to make a €25.00 contribution each week. The returns you will see from this contribution over time will be significant if you start early enough.
Starting a Pension
What Type of Pension Should I Set Up?
There are two main pension types in Ireland.
An employer pension scheme is a pension that is set up by your employer. Normally both you and your employer make contributions to this pension however in some cases your employer may be the only one contributing.
If you have an Employer Pension Scheme it will be a Defined Contribution Pension or a Defined Benefit Pension
A pension that is set up by you with the help of a financial advisor. Both you and your employer can contribute. This could be your only pension or you can set up a personal pension to boost your retirement income on top of an existing pension for example your employers pension scheme.
The type of pension that you choose to set up will depend on your personal circumstances. You will need to choose the pension which offers you the most value over the long term.
We have listed the some factors considered below but please note this is not an exhaustive list.
- Your Employment Status
- Your Income
- Your Tax Bill
- Monthly Contribution
- Pension Package Offered By Employer If Any
- Option To Retire Early From 50
- Pension Charges
- Historic Performance of Pension Investments
If you are considering starting a pension then speaking with a financial advisor will give you the best start. Your advisor will be able to help you extract as much value as possible when it comes to choosing the particular pension plan right for you.
If you already have a financial advisor ask them to review your options for starting a pension. We would suggest you confirm your pension advisor is from an independent broker meaning they must complete a fair analysis of the market comparing several providers to get you the best deal.
If you advisor is a tied agent or works in the bank it is likely they will only be able to provide you with products from one provider. They are only obliged to offer you the best product they have available even if better pension products are available to you elsewhere.
Alternatively, our Broker Partners offer a free start a pension service with no obligation. You will receive all your options in relation to starting a pension and can decide whether or not any of them are suitable.
We only work with independent brokers who complete a fair analysis of the market before recommending a pension product. This gives you access to many pension products and should help you secure lower ongoing fees as the pension providers have to compete to win your business.
Use our start a pension tool pension tool to claim your free no obligation review below.
Section 2:
Tax Relief on Pension Contributions
Tax Relief on Pension Contributions
Save On Your Tax Bill By Starting A Pension
The Government want you to save for a pension so that you can fund your own retirement. Social welfare payments made to those in retirement such as fuel allowance s cost the government a significant amount each year.
Still even with these payments on top of the state pension the Central Statistics Office found that one out of every three pensioners living alone were at risk of poverty. Link to CSO Survey
This is an astonishing figure and one that could get significantly worse as the population ages. With many of us having fewer children than our parents and life expectancy increasing, there will be fewer people in the workforce to fund state pensions in the future and more people who live long into their retirement. A recipe for disaster considering the government is already finding it hard to keep pensioners above the poverty line.
To encourage you to save for a pension to reduce the burden on the state the Government offers tax incentives to those who save for their pension. These tax incentives can be very lucrative indeed.
To understand how to extract the most value from starting a pension it is important to understand how and when these savings are made.
To understand how to extract the most value from starting a pension it is important to understand how and when these savings are made.
Use the arrows to move through the slides.
It goes without saying that no one enjoys paying tax on their hard earned income. So if there was a way you could avoid paying tax and legally keep this money then it would be worth taking a look at right?
There is a way to legally reduce your tax bill and you've guessed it...its by saving into your pension. The government has said that you will not be taxed on any funds you put into your pension subject to certain limits. This is known as pension tax relief.
So how does this work? Lets take a look at the examples below. Click on the boxes for more information. You will see the savings double for those earning over €40,000 per year.
John's Tax Bill
Any money John puts into his pension will not be subject to income tax. So if John put €5,000 into his pension. He would not pay any income tax on this €5,000. He would save the 20% tax he would have paid which would be €1,000 in this case.
Mary's Tax Bill
Mary will pay €4,000 in income tax on this €10,000 alone giving away nearly half of this income. If Mary put this €10,000 into a pension she would not pay any tax on the €10,000 saving the €4,000 she would have paid in tax had she not put it into her pension.
There are limits to the amount of tax relief on pension contributions you can claim in Ireland. The first is an age related limit. The second is an overall limit. Let's look at these in more detail below.
This rule if you haven't already guessed is determined by how old you are. The older you are the higher the percentage of your income you can put into your pension without paying tax. The table below shows these limits.
This rule if you haven't already guessed is determined by how old you are. The older you are the higher the percentage of your income you can put into your pension without paying tax. The table below shows these limits.
The second limit is a total earnings limit. At the time of writing this guide the limit is €115,000. This means you can only get tax relief on the percentage (based on your age) of €115,000 or under.
If you earn over €115,000 to calculate the amount you can put into your pension and receive tax relief you would use the percentage allowed from the table above of €115,000 only.
You can use our free pension tool to calculate pension tax relief limit based on your age and income.
Click Here To Use The Start A Pension Tool To Calculate Your Pension Tax Relief Limit.
Section 3:
Start a Pension in Ireland
How To
Start a Pension
Now you the importance of having a pension and the savings that you can make on your tax bill by setting one up you are probably wondering how you can get started.
The next section includes more information on how to set up your pension.
If you are ready to start a pension the first step is to get your pensions options prepared by a financial advisor. Your pension is a long term savings plan and having the right advice is crucial to choosing the pension most suited to you.
It's much easier than you think to get started. Take a look at how the process works step by step below.
Start Your Pension Today
The first step is finding out more about the options open to you for starting a pension. Your pension is a long term savings product so it is crucial to get advice from an independent broker who can complete a fair analysis of the market for you.
Do I Have Enough Money to Start a Pension?
Many people avoid setting up a pension because they are not sure how much it will cost. This is a common pitfall… and can result in people facing a retirement below the poverty line. Not a future any of us would wish for.
You might be surprised to find out that you can get started with as little as €25.00 per week. After tax relief the real cost (reduction in your take home pay) might only be €15.00.
To see how a little each week can go a long way overtime take a look at the examples below.
A contribution of just €25.00 a week made from age 30 with an average performance of 6% per year would equate to a pension fund in excess of €138,000 when you reach 65.
This contribution could cost you as little as €15.00 per week after pension tax relief.
A contribution of €50.00 a week made from age 30 with an average performance of 6% per year would equate to a pension fund in excess of €276,000 when you reach 65.
This contribution could cost you as little as €30.00 per week after pension tax relief.
A contribution of €100.00 a week made from age 30 with an average performance of 6% per year would equate to a pension fund in excess of half a million euros when you reach 65.
This contribution could cost you just €60.00 per week after pension tax relief.
Regardless of how much you contribute, starting early gives you the biggest head start as your money works harder for you over time. You can claim your free review now by using our Start a Pension Tool.
A contribution of €100.00 a week made from age 30 with an average performance of 6% per year would equate to a pension fund in excess of half a million euros when you reach 65.
This contribution could cost you just €60.00 per week after pension tax relief.
Regardless of how much you contribute, starting early gives you the biggest head start as your money works harder for you over time. You can claim your free review now by using our Start a Pension Tool.
Section 4:
Is It Too Late To Start A Pension?
No, it is never too late to start a pension. Some people reach their 50's, and even their 60's without putting a pension plan in place. Sometimes life gets in the way and you don't get round to it.
The realisation that retirement is only around the corner and you don't have a pension can cause significant stress and worry.
If this is you, you are not the alone. There are many people in this position. You just need to look at the CSO figures showing one in three pensioners living alone in Ireland are at risk of poverty.
You will need to speak to a financial advisor straight away and get a plan in place for building up your pension.
Putting it off will only make things worse by giving you even less time to build up your pension.
Whether you chat to one of our broker partners or take action with another financial advisor, we would urge you to take action as soon as possible.
Recession Impact
Our Broker Partners are also aware that many people nearing retirement age now were hit hardest during the recession of 2008. For many its impact is still noticeable.
Your advisor will work with you to put a manageable pension plan in place.
You will find once you have started your pension, this burden will lighten.