Are You Retirement Ready?
Oscar Wilde is quoted as saying “When I was young, I thought that money was the most important thing in life; now that I am old, I know that it is”
Planning for retirement is a balancing act, all of the key financial components such as existing pension funds, state pension entitlement, outstanding debts and any other income and assets need to be reviewed and considered so that you can reach the finish line towards living the retirement you always imagined.
The need for Advice
As you approach retirement you will have several pension options to consider and these can be both complicated and confusing. So, it makes sense to talk to an advisor, both before and after your retirement. A qualified advisor will be able to provide a complete financial review, keep you updated on how your pension funds are performing and advise you on the best way to manage your retirement fund to suit your personal circumstances and needs.
Before you make a final decision with regards to your retirement options it’s very important to discuss the following factors with your advisor:
- The current value of your retirement fund and is it possible to make an additional payment before retirement to help increase your fund.
- The level of income you will require in retirement.
- Your age, family situation and state of health.
- Other assets available to fund your retirement such as state pensions or rental income.
- Your preference in relation to risk and security.
- Succession planning – is it important for you to be able to pass your fund on when you die.
Attitude to risk
By the time you reach retirement your pension fund can be your most valuable asset, and you will want to make sure it is protected in line with your expectations. You can opt for a retirement solution that guarantees to pay you a regular income until you die. This is called an Annuity (Pension), there is no ongoing investment risk associated with an Annuity however there are valid concerns in relation to passing on assets after death to be considered.
Alternatively, you can choose to re-invest your retirement fund with the aim to provide an income and retain as much of the capital as possible or indeed increase the value of the fund over time. This is called an ARF (Approved Retirement Fund) or Drawdown option. This option was introduced in 1999 by then Finance Minister Charlie McCreevy with the objective to give more flexibility and control to pension savers at the point of retirement. This option carries an inherent investment risk, but one significant advantage of this is you can leave the balance to your family when you die. We will look at both these options in more detail shortly.
Tax free lump sum
One of the benefits of all occupational retirement plans is the option to take a tax-free cash lump sum payment from your matured pension fund of up to €200,000. The lump sum you will be entitled to can be calculated as either 25% of the fund value at retirement or a calculation based on your salary and service, the maximum lump sum you can take with 20 years or more of service is 1.5 times your final salary. Lower amounts are payable if you retire early or have less service or have retained benefits from a previous scheme.
If the lump sum is calculated as 25% the remaining balance can then be used to fund your retirement in the following three ways.
Pension (Annuity)
An Annuity is often referred to as an “income for life”. You have a regular, secured income which will continue for as long as you live. If you expect a long retirement, then this option may offer good value for your savings and the security of a lifetime income.
You may also provide a spouse’s pension after you die, subject to an additional cost.
You have the option of choosing an Annuity that increases at a set rate each year and guarantees payment for a specific number of years.
Consider this option if:
- You do not want to take onboard the investment risk associated with an Approved Retirement Fund.
- You want certainty about how much income you will receive each year after you have retired.
- Passing assets on to your estate following your death is not important.
Drawdown (Approved Retirement Fund)
The Drawdown option (ARF) gives you more control over how your retirement fund is managed. It is a special investment plan with the potential to grow your fund during your retirement years based on your own investment strategy.
The ARF is considered as a more flexible option – you keep your savings invested and withdraw funds as and when you need to (there are some rules to be discussed with your advisor). You are in control to invest your savings in line with your personal circumstances, with the potential to increase their value.
One significant benefit of this options is the funds in your ARF are available to your family after your death (subject to potential tax). One downside of an ARF is that without careful planning it is possible that you could exhaust your funds in retirement.
You can invest in a range of different investment funds depending on the level of risk you are comfortable with and you benefit from the tax-free growth of these funds. However as with any investment the value can rise as well as fall.
There are restrictions to investing in an ARF. If your guaranteed annual income is under €12,700, you must take out an Approved Minimum Retirement Fund (AMRF) first. €63,500 of your total fund is invested in an AMRF and the remainder is invested in an ARF.
Consider this option if:
- You are comfortable with an investment risk in retirement.
- You want your retirement fund to have the potential to continue to grow.
- You want more control over how your fund is invested.
- You want to pass on the balance of your fund after your death.
- You want to make withdrawals as and when you need to.
Taxable lump sum
In certain circumstances it may be possible to take the remaining balance of your pension fund as a taxable lump sum. You will however be required to pay income tax at the marginal rate, the Universal Social Charge (USC) under the Pay As You Earn (PAYE) system and Pay Related Social Insurance (PRSI) contributions if under age 66 which can make this a very inefficient use of your pension funds.
Consider this option if:
- You want access to your money in one lump sum and are not concerned about a significant tax liability.
Retirement Process
We want the administration
of your retirement benefits to be as smooth as possible so you can concentrate
on the things that are important to you. The more preparation you can do now,
the sooner your retirement benefits can be set up – and the sooner you can
start enjoying your retirement.
By preparing now, you can get a head start on your retirement benefits.
Your Timeline & Checklist
1.Review your investment choices via WTW Member Portal Lifesight.ie to ensure they remain appropriate for your personal attitude to risk and your benefit options in retirement.
2. Gather documents – start this process as soon as possible because your benefits will not be payable until we have received all necessary documents. Gathering these documents can take time, especially where originals are required, so it is best to start early and avoid a delay in the payment of your benefits due to missing paperwork.
3. Review your Retirement Option Statement – this will be issued to you approximately 3 months before your normal retirement age.
4. Meet with a financial advisor to consider your options as soon as you receive your Retirement Option Statement. Willis Towers Watson have a large team of impartial financial advisors which are available to you or you can speak with a financial advisor of your choice, if you prefer.
5. Ask questions sooner, rather than later, if you are unsure about the details in your Retirement Option Statement or if you are unsure of the supporting documentation we need in order to process your benefits – contact details are provided on your option statement.
6. Submit your documentation – return your Member Decision Form, Retained Benefits Form and any other supporting documents to the address given on the Retirement Option Statement.
We estimate that your retirement benefits will be set up within six to eight weeks of receiving all your fully completed forms and documentation. Help us to help you by ensuring all your documentation is received in good time.
By preparing now, you can get a head
start on your retirement benefits.
Don’t forget to check your State Benefits
You may be eligible for the State Pension (Contributory) from the age of 66 if you have enough Irish social insurance contributions. This pension is not subject to a means test. Eligibility is not affected by you having other sources of income. However, the State Pension (Contributory) is subject to tax.
- You are unlikely to pay tax if it is your only source of income.
- Because the social insurance conditions are quite complex, you should apply for a State Pension (Contributory) if you have ever worked or otherwise built up “stamps” in Ireland at any time.
- A number of pro-rata pensions are available to people who may not have paid contributions or who may have made other social insurance contributions.
- In the case that you retire early, you should maintain payment of PRSI contributions or seek credited contributions to ensure your entitlement to a pension.
- You can check your PRSI record by logging on to www.mywelfare.ie (after first getting a MyGovID).
Other useful links
Retirement Planning Council of Ireland:
www.rpc.ie
Citizens Information:
www.citizensinformation.ie
Consumer Association of Ireland:
www.thecai.ie
The Pensions Authority:
www.pensionsauthority.ie
Social Welfare:
www.welfare.ie
Irish Revenue:
www.revenue.ie
Expert Advice
The decisions you make between now and your retirement date will determine the level of benefits and income available to you via your LifeSight Account at retirement. However, your LifeSight benefits may only be one part of your total income in retirement. You may also have other pension assets, personal savings or other investments which you need to consider.
That’s why we recommend seeking Financial Advice, so you can be sure you are seeing the big picture where your finances are concerned. Our Financial Advisors are available to meet with you to discuss your existing pension provision, your plan and options at retirement and additional ways to help you maximise your benefits. If you wish to arrange a meeting, please complete the financial advice form or call the number opposite
Stephen Darcy MSc, CFP, TMITI, QFA, SIA, PTP, RPA (ADD PICTURE)
Associate Director – Wealth Management
Willis Towers Watson Email: stephen.darcy@willistowerswatson.com
