For many of us, pensions can seem difficult to understand. So we often put off making a decision about starting a pension plan. We hope this guide will simplify pensions for you and help you understand the most important issues before you choose a pension plan.

Why save for retirement?

When you retire, your earnings could be a lot less that you are used to. If you had to live on a State pension you would probably have to take a big drop in your income. Nobody wants to see their income fall too low when they retire. That's why you need to plan for your retirement.

A pension plan is basically a long term savings plan where you have regular amounts or lump sums to build up a retirement fund. Next to buying your home, it is probably the most important investment you will make in your life.

What are the tax benefits?

At present, the main tax benefits are

1. Tax relief on your contributions

You can see from the following table that for every €100 of your income you invest in a pension plan, the real cost to you (after tax relief) is actually less. It costs you:

€80 if you pay tax at 20%

€58 if you pay tax at the top rate of 42%

If you are an employee, your cost will be even lower than this as you can also get some relief on PRSI and health levy payments. If you have any employer pension plan, you don't have to pay tax on your contributions your employer makes.

The max earnings you can take into account for pension tax relief is currently €254,000 per year

2. Tax free investment growth

You don't have to pay tax on the growth of your pension fund. With most investment plans you have to pay a tax at 23% of any growth you earn. So your pension fund can grow in value more quickly than a standard investment plan.

3. Tax free lump sum when you retire

When you retire you can take part of your pension fund as a tax free lump sum. The amount you can take depends on the type of pension plan you have.

How pension plans work

Who provides pensions?

Life assurance companies and investment firms are the main pension providers in Ireland. They employ specialists called fund managers. The fund manager invests contributions and manages the overall pension fund.

What happens to my pension contributions?

The pension fund manager invests your contributions in one or more pension funds. These funds are used to buy and sell assets, such as shares, property, bonds and cash. There are many different types of pension fund. Each invests in a different mix of these assets.

How does my pension fund grow?

The value of the fund rises and falls depending on the performance of shares, property and other assets in the fund. The fund is expected to grow at a certain amount each year, but this is not guaranteed and fund values go up and down over the years. Think of your pension as a long term plan that you need to keep for 20-30 years. This gives enough time for your fund to recover growth after any short falls in value. Generally the longer you keep your contributions invested, the more likely the fund will grow in value.

When should I start saving for retirement?

The earlier you start the better. You will have more time to make contributions and more time for your fund to grow in value. If you don't start a pension until your 40's, you will have less time to build your fund. So you will have to pay much higher contributions to give you the same pension you would have had if you started saving in your 20's or 30's. If you are older when starting a pension, don't let this put you off, as it is better to get a smaller fund than no fund at all!!!