Dealing with financial queries for more than 30 years, I’m quite often posed the question “I’m about to retire, what are my options?” I’m delighted when asked, because at least I know they’re taking the decision seriously. A lot of people actually put more time into planning their summer holiday than they do into their retirement. First off though, it’s important to know, your retirement options will to a large degree be dependent on your employment status and type of scheme.
Public Sector Employees or those in an ever dwindling number of Defined Benefit pension schemes generally have one set of rules. The rest and by far, a much bigger number of us in Personal Pensions or Defined Contribution pension schemes have other options available to us. I’m going to briefly touch on both in this blog. Over the next couple of blogs, I’ll then focus in on those I see as being most need of advice. The self-employed, proprietary directors or those in privately funded company pensions, funding their own retirement.
Pension law and practice can be a complicated subject, so I’ll try to simplify it. I’ll do this over a few blogs and try to explain your options in plain English. I’ll try not to get too technical or into the specifics, to do so would only serve to regurgitate more confusion. God knows, we have enough of that.
For Public Sector Employees, I am setting out the average benefits generally available to you. I am also basing these figures on a full career, it’s less if you don’t have 40 years-service. You will normally be eligible to retire, at age 60. You can take a tax-free lump sum of up to one and a half times your final salary provided you have at least 20 years’ service and then get a pension guaranteed for the rest of your life. This pension will be 50% of your final salary and index-linked to take account of inflation. When you die, your spouse will receive half your pension for as long as s/he lives. These terms are so good that most in the private sector could only dream of such financial security in retirement. As such, there’s little need for advice or further elaboration here on this subject. Be happy, enjoy 🙂
Many semi-state companies or larger corporations operate what’s referred to as Defined Benefit pension schemes. These gold-plated arrangements offer terms very similar to those in the public sector. The employer takes on all the funding and investment risk to provide the benefits at the employees retirement age. Similar to the public sector arrangement, you get a tax-free lump sum based on final salary and a pension guaranteed for life which normally includes spouse’s pension entitlements too.
These Defined Benefit schemes are very expensive to fund, so much so that in recent years, a large number of them have run into financial difficulty. As a result, many companies are now changing to Defined Contribution schemes and thereby passing the risk to the employees. These employees may now have more retirement options going forward. However, the benefits bestowed on them will almost certainly not be as good. Generally speaking, you will retain the benefits built up to date, but left positioned somewhere between the “Sorted” public servants and the “Sort it Yourself” private sector.
The Private Sector, on the other hand is made up of SME’s of all sizes including the self-employed, business owners and proprietary directors. These people have funded their own pensions and are most in need of advice, come retirement age. If you fall into this category, you are entitled to take a tax-free lump sum of 25% of your accumulated fund, within limits. The balance can be used to purchase (an annuity) a guaranteed pension for the rest of your life. Alternatively, you can invest the balance in a relatively new option, an Approved Retirement Fund (ARF). I will break each of these down and explain in more detail over the coming weeks.
Separately, it’s important to note that these Trojans of society, having paid the satisfactory PRSI contributions all their working lives will at least be entitled to the contributory pension. This is currently €230 per week, and payable from age 66. While this blog is about those options available to someone retiring today, sufficed to say this retirement age is being pushed out. The contributory pension age is being raised to 67 in 2021 and to 68 in 2028.
So, in the next couple of blogs, I will look at the options available to the biggest proportion of the population nearing retirement. Those as I see it, who are in real need of advice. I’m talking about the self-employed, company directors, professionals and all those funding their own pensions. Next week, I will focus in on annuities, another word for a guaranteed pension for the rest of your life, and look at the pro’s and con’s associated with them.
Please share this blogpost if you think it has been informative. If you’re nearing retirement and would like to know what options are available or best for you, or have any other queries on this subject, please email paul@lifestylefinancialplanners.ie
As always, contact me if you have any personal Financial Planning queries or would like me to provide an insight into another area of interest in a future blogpost.
Paul is the Managing Director of Lifestyle Financial Planners Ltd and been in the Financial Planning business since 1985. Lifestyle Financial Planners offer specialist, tax-efficient wealth management, retirement and estate planning solutions to our clients. Paul is a Certified Financial Planner and holds a Masters Degree from UCD in Financial Services and Risk Management.
Tel: 096-75951 Mob; 086-8053755, www.lifestylefinancialplanners.ie
The information contained in this article is for general information only. It cannot be relied upon as the basis for any form of agreement or advice. We advise readers seek professional tax and legal advice where necessary. The information given is a guideline only and does not take into account your own particular circumstances.
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