There is a lot of focus on the area of savings for retirement lately. Questions are being asked about the real value in having a pension when we finish working. This is very much an individual choice and one that needs to be addressed in a meaningful way, by all of us at some point. I believe we must plan for our own retirement as no one else will look after us in our non-working years. A pension remains the best way to do this. Here are my top eight reasons why pensions still make sense:
1. What will the State pension be in the future?
The State pension (contributory ) rate for a single person is €230.30 per week. However there are currently six adults of working age for every one adult over 65, but this ratio is predicted to change to two to one by 2050. Also, the national Pensions Reserve Fund has been virtually cleaned out to make investments in credit institutions and Irish Government Securities. The pressure on the State pension is enormous - it cannot be relied upon to be there in years to come.
2. State pension age increasing
Legislation is now in place that will increase the age at which the State pension becomes payable in the future. A person turning 50 this year will not receive his/her State pension until he/she is 68.
3. Life expectancy
Life expectancy rates are increasing for males to age 76 and females to age 81. Good news? Of course, but a longer time to maintain financial independence.
4. Income tax relief
Income tax relief is still available on contributions made personally to a pension. This may change, but right now relief is available on up to 41 per cent of the contribution for a top rate tax payer, or 20 per cent for a standard rate tax payer. For a higher rate tax payer, this is equivalent to the Government topping up your net pension contributions by up to 69 per cent.
5. Tax free retirement lump sum
Tax free lump sums are still available when taking retirement benefits. This is 25 per cent of the value of your fund, or 1.5 times final salary if a member of an occupational pension scheme, to a maximum of €200,000. An amount over this will be taxed at your marginal tax rate.
6. Your pension grows tax free
Pension funds are exempt from income and capital gains taxes so your pension fund grows tax free - unlike savings or investments in a bank or post office.
7. Retirement options
Recent legislation changes have allowed pension owners to take control of their investment at retirement age. They are no longer forced down the road of turning their pension pot into a regular income. They may now take control of their income draw-down and investment options in retirement.
8. Investment options
Pensions now allow for a wide range of investment options to suit the risk appetite of the individual. In particular in these volatile times, a range of secure/capital protected options are available.
So despite some negative attention in recent times, there are still many valid reasons to plan for your retirement through a private pension.
Eddie Melvin is an independent broker. For independent advice call into Melvin Financial Services, Pearse Street, Ballina, or call 096 70244.
