There is only one way to reliably provide for your retirement and that is to invest in a pension.
As recent changes have shown, a state pension is not immune to market forces and, if projections are accurate, the date you become entitled to this could be further pushed back.
Already, the state pension has been moved from the long-established age of 65 to 67/68. With the aging population growing, providing a state pension has become increasingly difficult.
Funded by day-to-day taxation, the higher the population not working, the greater the strain on the government to meet costs.
This makes maintaining the level of state pension payments a challenge. There is no guarantee that the state pension will be paid at its current level at the time of your retirement.
A government think tank concluded that the only realistic solution to the state pension ‘time bomb’ would be to move the retirement to age 70.
Finding an alternative
Possible solutions for maintaining the current state pension provision are:
- Higher taxation
- Automatic enrolment into pension schemes
- Alter pension starting date
- Reduce level of payment
When the starting age at which people can draw their state pension can be altered at the stroke of a pen – such as in the budget of 2010 – the best option is to take matters into your own hands and invest in a private pension.
Individuals need to take control of their financial plans for retirement to ensure a comfortable standard of living.
Cutting income tax payments
All payments made into pension plans are given tax relief at your highest rate of tax. This is an excellent way of saving; for example if you pay 40 per cent tax, the net cost of every Euro invested is 60 cents.
It is a benefit that is there for the taking to help people boost their pension funds. Not capitalising on this tax relief is essentially missing out on free money.
Pensions are a highly effective way of saving money. If you choose to save money in a bank the interest will be subject to DIRT tax, which is 39 per cent for most investors. Growth achieved through your pension plan will be tax free.
Are pensions only for ‘grown ups’?
Unfortunately pension plans are often perceived as complicated and left until the ‘future’. Pensions need to be treated as long-term savings plans with the benefit of tax incentives.
Accessing your pension plan no longer means you have to buy an income for life. Pensioners can reinvest capital and draw an income from the remainder.
Cash lump sums
Taking a lump sum is a popular choice that applies to all pension savers, including sole traders if they have set up a Personal Pension Plan or RSA Plan.
Company directors or long-serving employees (20 years or more) can take a 25 per cent lump sum but can also take up to 1.5 times their final salary.
Have I left it too late?
Better late than never really does apply to pensions. Clients seeking financial advice on the state of their pensions can decide they are not investing enough to build up a large enough pension and may consider giving up. It makes sense to contribute whatever you can afford then, should the opportunity arise, increase that at a later date.
What if I die before retirement?
Ideally pensions will finance a long and happy retirement, however, in the event of death before retirement the ‘then value’ of your pension pot is payable as a cash lump sum to your Estate.
For advice on managing your pension plan contact Full Circle Financial Services Limited.