The Orca Financial Guide to understanding Personal Pensions
What is a Personal Pension?
A Personal Pension is a long-term private investment plan – separate from the State pension scheme – aimed at helping you set aside money for your retirement. The ultimate value of your pension plan will depend on the contributions you have made over the years and the investment return the funds have achieved. Personal Pension Plans are designed for people who don’t have access to a pension scheme through work and want to set aside money themselves, and those who are self-employed.
How much should I invest in my Personal Pension Plan?
Before you decide how much you are going to invest in your Personal
Pension Plan there are a number of things you need to think about:
- What age you’d like to retire at
- Your current age
- Your existing income
- How much you can afford to set aside each month
General consensus suggests you should aim to retire on two thirds of your current income (this figure includes the State Pension). A Personal Pension Plan gives you the flexibility to make contributions either monthly, quarterly, every six months or every year. You can also boost your Personal Pension Plan with a lump sum payment at any stage. You can decrease or increase your contributions at any stage, which is useful if you begin to earn more money, or on the other hand, if you are having financial difficulties. You can start a Personal Pension by investing as little as €100 per month.
What are the tax advantages of a Personal Pension Plan?
A Personal Pension Plan is a tax-efficient way for you to save for your retirement, as your monthly contributions qualify for income tax relief at your marginal tax rate.
For example, if you pay tax at the 40% rate, for each €1 you contribute to your Personal Pension Plan you can claim 40 cent back in tax relief. So if, for instance, you invest €1,000 in your Personal Pension Plan per year, it will actually only cost you €600 after income tax relief.
There are limits to the income tax relief you can get from the Government, and the maximum contributions on which you can get income tax relief in a year vary by your age.
|Age||Amount which qualifies for tax relief|
|Under 30 years:||15% of net relevant earnings|
|30 to 39 years:||20%|
|40 to 49 years:||25%|
|50 to 54 years:||30%|
|55 to 59 years:||35%|
|60 and over:||40%|
In addition, the growth achieved by your Personal Pension Plan is not subject to tax. This means that you gain from any investment growth and income it earns.
How do I decide where to invest my Personal Pension Plan?
You may be relying on your Personal Pension Plan to provide a vital source of income in retirement, so it’s important that you invest it wisely. An Orca Financial Pension Advisor can take you through the many options that are available – from low and high risk funds investing in particular types of assets, to managed or mixed funds investing in a spread of assets and self-directed funds, where you choose the funds or assets in which you invest.
The plan you choose should offer a diversified range of investment options that can meet your changing circumstances over time. Any choice you make should be based on the level of investment risk you are comfortable with, and should take into account your financial circumstances and goals. It is important to understand that the value of your Personal Pension Plan can fall as well as rise, depending on which funds or assets you invest in.
You can select a normal retirement age between 60 and 75.
What are my retirement options?
The Personal Pension Plan is designed to provide a fund which you use to purchase benefits at retirement. From the options available, you can decide the format benefits should take.
- You can choose to take a tax-free lump sum of up to 25% of the value of the pension fund
- The balance of the capital can be used to purchase an Approved Retirement Fund or an annuity to provide you with an income
The retirement benefits provide under a Personal Pension Plan will be directly determined by the accumulated value of the plan attributable to contributions paid to the plan and the level of retirement benefits is not guaranteed.