Daniel Hardiman of Hardiman Life & Pensions specialises in pensions and retirement planning. Here he provides answers to the most common questions asked about pensions and tax relief schemes
My accountant has advised me to pay into a pension to reduce my income tax bill. Is this worthwhile?
Your accountant has given you good advice and has outlined one of the main benefits of investing into a pension – tax relief. If you are on the higher rate of tax, your pension contribution qualifies for 40% tax relief. For example, If you are on the higher income tax rate, every €1,000 contribution to your pension will reduce your tax bill by €400. So the real cost of €1,000 in your pension is only €600.
There are other tax benefits of investing in a pension such as tax-free investment growth up until retirement age and a tax-free lump sum at retirement date equal to at least 25% of the value of your pension. The tax benefits of pensions actually work out better than the old SSIA scheme in the majority of cases.
When is the Best Time to Start a Pension?
Although it is generally never too late to start a pension, the earlier the better. The table below illustrates the impact that starting your pension early can have:
Age you Start Your Pension Projected Future Value of pension at age 65
These figures are based on a €250 monthly contribution and a projected investment return of 5% per annum.
I heard of someone’s pension dropping significantly before retirement age. Can this happen to me?
The best returns in pensions tend to come from investing in higher risk assets such as equities and property. However, there can be periods where these types of investments can drop in value. If you are at least 10 years away from retirement, you have the time to allow these assets to recover in value in the event of a drop. However, as you get closer to retirement age, you should gradually start to transfer your pension to lower risk assets that focus on preserving the value of your pension and this will protect you from your pension dropping in value before retirement.
Unfortunately, there were many individuals who were retiring around the time of the market crash in 2008 and for those without the services of an astute financial advisor who reviewed their strategy on a regular basis saw their pensions drop in value. It’s important that your pension is well diversified across a wide range of assets classes and this will reduce the risk level of your pension as you approach retirement.
For more, read this week’s Connacht Tribune.