What is a pension?
Basically, a pension is a savings plan you contribute weekly, biweekly, monthly or additional through additional voluntary contributions (AVC).
The idea behind a pension is that when you stop working, you will have enough saved to live off it for the rest of your life.
Pensions are attractive to entice you to save into a pension vs an ordinary savings plan. There are three main differences between a pension and an ordinary savings plan.
- Tax relief – for every €1 you put into a pension you save tax. Depending on your tax rate, you could save between 20 – 40 cents for every €1 you put in.
- Tax-free growth – if you were to put your money into a regular savings account, any deposit interest you receive is subject to tax, growth in a pension is tax-free.
- Tax-free lump sum – when you retire, you can potentially take a tax-free lump sum of up to €200,000 and a further €300,000 at the reduced tax rate of 20%.
The most recent statistics on pensions in Ireland states that around 59.8% of workers have pension coverage. But with the above incentives, why is that figure not higher? One reason could be that setting up a pension and all that goes with can be confusing. Auto-enrolment could combat this issue. However, in February 2021 that auto-enrolment would be delayed until at least 2023. Auto-enrolment would see a rise in pension coverage as employees would automatically be enrolled into a pension scheme. However, we will have to wait another couple of years at least to see the auto-enrollment in action.
If you need help with your pension or are looking for financial planning, contact us today to see how we can help.