The Orca Financial Guide to understanding
Company Pension Plans
What is a Company Pension Plan?
A Company Pension Plan is a pension scheme for all employees of a company, which is set up by the employer and where the employer makes payments into it on behalf of employees.
Investing in a Company Pension can provide you with:
- A tax free lump sum at retirement
- A pension for life
- A spouse’s pension and/or a pension for your dependent children if you die during retirement
What about the State Pension?
Relying solely on the State’s old age pension could be a costly mistake. The more you earn, the smaller the portion of pre-retirement earnings the State pension will replace. It is important to realise that, here in Ireland, the State pension does not become payable until age 68. So if you plan to retire at 60, for example, you will not receive any State pension payments for eight years.
When should I join our Company Pension Plan?
Right now! Because as you get older both the number of contributions you can make, and the timescale over which your Retirement Fund can accumulate reduce. The illustration below shows how even a small delay in starting your retirement planning will result in the need for significantly higher monthly contributions as you get older.
|Target Retirement Income of €10,000 pa (in today?s money) at age 65|
|Age 20||Age 30||Age 40||Age 50|
|Contributions per month|
What if I want to retire early?
If your employer agrees to it, you can take retirement benefits from age 50 onwards. However, your Retirement Fund and the size of the retirement benefits on early retirement will be less that if you continue to normal retirement age.
What happens if I die before retirement?
The value of you accumulated Retirement Fund will be available to provide benefits for your spouse/dependants.
Also, if it’s included with your Company Pension Scheme, Life Insurance cover may provide a lump sum death benefit and may also provide spouse/ dependant’s pension.
Is a Company Pension tax-efficient?
Yes, it is. You are entitled to full income tax relief on any contributions that you make to your Company Pension Plan. Your employer deducts your contributions directly from your salary before income tax, so you receive immediate tax relief at your highest rate, as the table below shows.
|Gross Monthly Contributions||Net Monthly Contributions||Tax Savings|
|40% Tax Payer||€200||€120||€80|
|20% Tax Payer||€200||€160||€40|
Note: Tax savings are based on income tax relief at your marginal rate of tax
These tax savings are subject to age-related Revenue limits on your contribution of:
|Age Attained in Year||% of Net Relevant Earnings*|
|30 to 39||20%|
|40 to 49||25%|
|50 to 54||30%|
|55 ? 59||35%|
|60 and over||40%|
- The Revenue currently allows you to take up to two-thirds of your earnings at retirement as a pension for life, depending on your years service and size of your Retirement Fund.
- You can exchange part of your pension income in return for a tax free lump sum (up to 150% of your earnings at retirement – again depending on your years of service and the size of your Retirement Fund).
- The balance of the monies can be used to purchase a guaranteed income for life or purchase an Approved Retirement Fund.
- You may also choose to provide the security of a spouse’s pension for your surviving spouse, in the event of your death, by giving up part of your pension income. Additionally, you can guarantee the continuation of your original pension for up to ten years from retirement in the event of your death.
Can I make additional contributions to boost the value of my Retirement Fund?
Yes, you should always consider making additional contributions to your Retirement Fund. This can be done through Additional Voluntary Contributions (AVCs). However, the total contributions you can make to both AVCs and your pension are subject to the Revenue limits, which our Company Pensions expert will advise you about.