How It Affects Your Pension Plan

Workers across Ireland have worked and saved for years to secure a future in their golden age. However, the compulsory retirement age under most retirement contracts has changed. Those recruited for employment into the public sector before 1st April 2004 who did not reach the previous compulsory retirement age (65 years of age) before 26 December 2018 now have a new retirement age of 70 years. Workers have the option to work to age 70 on the current terms and conditions.

Let's dive into how this new retirement age compares to other states globally and what it means for your pension. Forward-looking retirees are considering more factors than ever, including:

•       Assurances of family security at the end of their life

•       Pension and retirement plans that suit their circumstances

•       Whether state-provided pensions will be robust for the lifestyle they want

•       Affordability of retirement plans

•       How much to save or invest, and how soon

It is important to note that those who are self-employed have no set retirement age. Additionally, some employment contracts have a mandatory retirement age outlined in an individual’s contract of employment which may differ from the State’s guidelines. 

Let's get into how these changes will affect your retirement plans and the options available to you.

Different Types of Pensions

For those who joined the public service after 1st January, 2013, their employment carries a minimum retirement age of 66. This age is consistent with the State Contributory Pension, and has a mandatory retirement age of 70 years of age - so long as you remain suited for your role and in good health for your occupation.

There are different types of pensions which are provided by various sources and accrue value in different ways.

State Pensions

State pensions, as the name suggests, are pensions paid out to retired workers by the State once an individual turns 66 years of age. The State pension is intended to provide all who qualify with a basic retirement income to ensure that all who receive it can be guaranteed a basic standard of retirement living. Two different types of pensions are currently provided by the State, contributory and non-contributory. 

Those who qualify for the Contributory State Pension (SPC) are entitled to receive larger pension payments than those who do not. Qualification for the SPC is dependent on the amount of PRSI (Pay Related Social Insurance) an individual has paid over their working life. Those who do not qualify for SPC are entitled to the Non-Contributory State Pension. Non-Contributory State Pension payments are taxable, however, it is unlikely that someone will be taxed on these payments if it is their only source of income.

Occupational Pensions

Your employer supplies occupational pensions. These pensions are sometimes referred to as company pension plans. They provide a regular income at the time of retirement. Many occupational pensions also supply retirees with a lump sum payout at the point of retirement.

Contributions are set, and your benefits will depend on that amount in a defined contribution scheme. However, in a defined benefit scheme, the benefits you will receive are set in advance and may be tied to the length of your time in service.

Personal Pensions

Workers who opt not to become a part of an occupational pension scheme have additional options in the form of personal pensions. These plans are managed by an investment company or a life assurance entity. 

Personal pensions include retirement annuity contracts (RAC) and individual retirement savings accounts (PRSA). A RAC is an insurance contract approved by the Irish Revenue Authority that allows for tax relief on any contribution made by a worker. In addition, it makes available a tax-free lump sum at the time of retirement.

PRSAs are investment accounts that make returns on investments into income at the time of retirement. This account is a long-term personal pension plan that carries some tax relief for contributions. The personal retirement savings account is often favourable for those with no pension provision. Workers can enter into a new employment contract and use their existing PRSA or change to another one without incurring any fees.

Investment Plans for Retirement 

The long-term PRSA allows those with no pension provisions to set aside a pot of money to retire via the plans described above. Employers who do not or cannot supply an occupational pension scheme must make a minimum of one standard PRSA available. Additionally, if a worker is not entitled to a pension scheme in their first six months of service, they must have access to a PRSA by their employer.

The types of PRSAs that must be available are:

Standard PRSA

In this plan, the charges are capped and there are restrictions on the types of investments available. These restrictions are not in place for non-standard PRSAs. 5% on contributions and 1% per year are applicable for standard PRSAs. These contributions can only go toward investments in pooled funds (sometimes referred to as managed funds).

Non-Standard PRSA

Unlike standard PRSAs, charges are not capped for non-standard PRSAs and investment types are not limited to pooled funds. Sometimes called advice, PRSA is for individuals who wish to save in a tax efficient manner to provide an income and /or tax free lump sum (subject to revenue rules) when they retire, and who do not expect access to the money invested until they retire.

Life Insurance and Life Assurance 

Life insurance serves to ensure your family can financially cope when you pass away. Living expenses, childcare costs, or a mortgage may all need maintenance at the end of your life, and life insurance helps protect your family from undue financial strain. Investing in a life insurance or assurance plan is particularly valuable for the primary income earners in their households.

There are two types of life insurance policies, term insurance policies and whole life policies. Term life insurance supplies a lump sum to a named beneficiary within the policy term. Benefits include serious illness coverage in those potentially susceptible to debilitating illnesses. The pay-out is also tax-free, which is a benefit for many. However, whole life insurance provides a lump sum of money to a named beneficiary at the time of your death. This sum is sometimes called a death benefit. Whole life policies also provide a savings element that can generate cash value over time. Those who incur financial hardship might benefit from this policy, as investors withdraw the value under certain conditions. Life assurance is both an insurance policy and an investment. 

Why the Retirement Age Changed in Ireland 

While there is no single explanation for the change in arrangements surrounding retirement, many public servants are prescribed retirement based on their age. Sometimes the date of retirement is wholly situated around the recruitment age of the worker and the suggested time when they may become less fit for their role.

There are often citations of improvements to the health and safety of older working citizens as reasons behind an increase in retirement age. Life expectancy also changes. Consequently, the years a person may spend at work tend to increase along with life expectancy. 

Retirement Age in Ireland Compared to Retirement around the World 

In Ireland, the life expectancy is 82.3 years, with a retirement age of 66. The workforce can continue their employment and contracts so long as the employer accepts the arrangement. Capable and safe workers can vary in age and sometimes work late into their years.

The retirement age in Singapore is 62, where the life expectancy is 83.5 years. In the United States, the retirement age is 66, and the life expectancy is 78.8 years. In a place like Hong Kong, with a life expectancy of 87.6, the retirement age is not fixed though it tends to fall between 60 and 65.

Again, the health and wellness of the workforces around the globe tend to drive the retirement age. However, an employee who can continue working safely and effectively may also enjoy the richness of continued employment along with a sense of contribution that it provides. 

Planning for Your Retirement 

Planning for your retirement means ensuring you personalise the risk and reward of your investments. Taking an earnest look at the expenses you incur regularly and finding out what they will be in retirement is vital. Have your savings returned enough to provide comfort, secure freedom, and keep you living an enriching life in your retirement years? These are important things to consider.

Knowing that you can afford the lifestyle you would like in retirement is also a critical element. Your lifestyle around your hobbies, your travels, and day-to-day activities is something future retirees should map out.

Here at FitzGerald Flynn Insurances, we can help you plan for your future and build a bespoke investment and retirement plan that works for you and your situation. Get in touch with us to learn more about how to best set you and your family up for your golden years.

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