So you are ready to start a pension. We understand that it can be a bit confusing. So we have put together this introduction to pensions to help you figure out the basics and get set for your future.
A pension is a long-term savings plan that you use to put away money for your retirement. The sooner you start adding to it, the more opportunity it has to grow. The biggest difference between a pension and a standard savings account is that you can claim tax relief on the money you pay into your pension.
Setting up a pension is one of the most important financial decisions you will ever make. But it doesn’t have to be a headache. In fact, once you make a few basic decisions, it can be surprisingly easy to get started.
Friends First has a range of pension plans to choose from – your Financial Broker will talk you through the details.
But just so you know what to expect, lets take it step by step.
Understand why you need to save for your retirement
Once you stop working, you will need an income. Most of us will be entitled to a State Pension of €238.30 per week (as of March 2017). This will just about cover the basics but it certainly won’t give you a comfortable lifestyle in your retirement.
Also, you won’t be entitled to a State Pension until you are 66 at the earliest. That will rise to 67 from 2021 and 68 from 2028. So if you want to retire earlier, you will need to have your own pension plan in place with sufficient funds to maintain your standard of living.
Decide how much to save and start your pension
If you are wondering when you should start, we say the sooner the better. If you set up your pension early, the money you save has longer to grow, so you don’t need to put as much in.
But it is never too late to get started. You may just need to pay in more of your salary to make up for lost time.
There is no “one-size-fits-all” answer here. It really depends on 3 things:
How much you can afford to pay
Think about how much you have to pay in bills and basic living expenses. Then look at what you have left and talk to your Financial Broker about how much you should pay. You can always increase or decrease the amount as your circumstances change.
When you want to retire
If you start late or want to retire early, it makes sense to put as much as you can afford into your pension. That will help to make sure you have a sufficient retirement fund when you need it.
How much you think you will need for a comfortable retirement
Ask yourself these questions. What bills will you have to pay after you retire? Will you have any debts to pay off? Have you decided what kind of lifestyle you want to have? Do you have any investments, property or savings that could give you an income after you retire? Your Financial Broker can talk you through all these questions and help you decide on your target retirement figure.
You can also use our handy Pensions Calculator to give you an idea of how much you need to start putting away for your retirement.
Know the rules and benefits
Like all good things, there are some rules to be aware of. There are limits on how much you can pay every year into your pension fund, but these are very generous. There are also rules about how and when you can take your pension benefits. The basic idea is that a pension is meant to provide an income for when you retire so you are generally not allowed to dip into it.
The government recognises how important it is for people to plan for their retirement so they offer generous tax relief for those working and companies who take out pensions. This makes a pension fund without doubt the most efficient way of building up your retirement fund.
Tax relief on contributions
The government lets you invest sizable amounts of your earnings into a pension and claim tax relief at the highest rate you pay. As you get older, the amount you can invest each year increases.
Tax-free growth on your investments
Any growth on your investments is tax-free – you don’t have to pay income tax or capital gains tax on it.
A tax-free lump sum when you retire
For a lot of people, one of the best parts about retiring is being able to get a portion of their pension fund as a tax-free lump sum. So you could finally have the money to buy that car you have always wanted, or go on the dream holiday you have been planning for years.
Understand the risks
Your pension is an investment. And as with any investment, there is a risk that you could lose money. We have a broad range of funds that you can choose from, with different levels of risk.
Try our Investment Suitability Tool to learn more about your appetite for risk. Then talk to your Financial Broker about which funds would suit you best.