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Put a Safety Net under your Income – Salary Protection

17 May 2016

Many of us recognise that our income will cease when we retire and some of us have taken steps to ensure we have a replacement income in retirement – by setting aside monies now to build up a pension to replace that income.

‘Retirement’ never really comes as a surprise – in effect we have plenty of notice of this pending event so we can take a longer term view and start planning for the day our income will cease.

However shouldn’t we also think about what might happen if our income was to stop BEFORE we reach retirement?

An individual aged 40 who retires at 65 might expect to have to replace their income for upwards of 20 + years in retirement but similarly if the 40 year old is unable to work they may have to find a replacement income of upwards of 25 years BEFORE they might receive their pension.

An individual earning € 40,000 p.a. at age 38 with an anticipated retirement age of 65 might expect to earn in excess of € 2,000,000 (with CPI increases of 3% p.a.) over this period and this is why we continue to all agree that your health is indeed your wealth.

Any number of events could result in a loss of income (accident / illness / injury / accident). Any such loss of income is going to result in a drastic and in many cases immediate impact on our lifestyle.   At best we might be able to defer any immediate impact by resorting to savings / the kindness of friends and family but this isn’t really a plan we can rely on – certainly not for the long term.

An Income Protection Plan is a plan which pays you a regular income until such time as you might return to work OR until your selected retirement age if you were unable to return to work.

The maximum amount of the annual income benefit cannot exceed 75% of your earnings (Less State Disability Benefit if applicable to you) however rather than necessarily strive to secure this level of cover it is worth putting in place an ‘income’ which might at the very least reflect your mortgage repayments – so at least your home is NOT AT RISK if your income stops.

The premiums you pay are fully tax deductible at your highest rate of tax. Hence if you pay tax on some of your income at 40% and the gross monthly premium for your plan is € 60 per month the NET monthly cost is € 36 per month.

No payment is made for the first number of weeks – often referred to as the ‘deferred period’ so you would have to cover this period (in many cases your employer may provide a sick pay arrangement which addresses this period) from your own resources.  Income Protection Cover is designed to provide a long term solution to a long term problem rather than a short term solution to a short term problem…

….and No – the Plan does not cover loss of income in redundancy.   At first glance this seems somewhat disappointing and I do acknowledge that redundancy holds a real fear but it is also be fair to say that only the most pessimistic of us would believe that should redundancy occur it would leave them with no options.  The difference with suffering an accident / illness or disability is that our options on losing our income could be so much more limited.

How much might it cost me to secure my income?

The cost of securing this cover is surprisingly affordable….

Example:-

Office Based Employment  /  Age 38 Next Birthday  / Salary of  € 30,000 / No payment of benefits for the first 26 weeks  / Expiry age of 65 / The payments to escalate each year by 3% p.a. / reviewable premiums / employee tax rate of 40%

Gross Monthly Cost of € 56.75 /  Net Monthly Cost (40% tax rate) of € 34.05

(Quotations provided by Friends First – March 2016)

The total annual NET cost of € 408.60 represents as little as 1.5% of the total annual income benefit.

If you are currently contributing to a pension plan it would make sense to ‘redirect’ a small amount of these payments into an Income Protection Plan so that you now safeguard both your PRE-RETIREMENT income and your POST-RETIREMENT income.

If you would like to discuss this type of cover in more detail don’t hesitate to contact us at Full Circle Financial Services Limited where we would be very pleased to help you.

Email:- Info@fcfinancial.ie

Website:-  www.fcfinancial.ie

Contact Number:- 01 2530060

Full Circle Financial Services Limited is regulated by the Central Bank of Ireland – C130136