In part one of our Q&A with pensions expert Claire Louise Murphy, we looked at some of the basics when it comes to pensions, who should have one, when you should set it up, and why it’s such a vital part of planning your financial future. If you missed it, check it out here.
In this second instalment, Claire Louise Murphy from Aviva Life and Pensions answers questions on the different types of pensions, how much you should save, what happens when you move jobs or take time away from work, and much more
1. What are the types of occupational pensions?
There are two types of occupational pensions:
- Defined Benefit (DB) is where the contributions that you pay will provide a set benefit at retirement e.g. an annuity of €12,000 per annum.
- Defined Contribution (DC) is where the contribution is set at either a percentage or amount of your salary, with the aim to achieve a pension pot to either purchase an annuity or invest in an Approved Retirement Fund (ARF) upon reaching retirement age.
2. How much should you pay into a pension?
The figures will change from one person to the next, but as a basic rule you should pay in what you can afford:
- If it’s an individual pension, there’s usually a minimum contribution set by the provider, e.g. €100 per month. If you contribute more than this amount, you can decrease it to the minimum amount or take a contribution holiday any time you need to reduce your outgoings for some reason; the contributions can then be increased or started again at any time.
- If you're in a company pension, it’s usually a fixed amount or percentage of your salary that goes towards your pension.
3. Where exactly does that money go?
Each pension policy has an investment fund, or funds, available; you’ll select these when filling out your application form. An investment fund is a way of investing money alongside other investors to benefit from the inherent advantages of working as part of a group such as reducing the risks of investment by a significant percentage. Each contribution will purchase units in the fund(s), with the aim of growing the investment over a long-term period, with the benefits awaiting you once you reach retirement.
4. Can low-income earners afford a pension?
Everyone’s financial position is a little different and dictates how much they can contribute to a pension – if at all. Since the tax relief is available to all earners, regardless of salary, you might be surprised at just how affordable starting a pension can be. If you can’t afford a pension right now, that’s OK – but you should definitely keep in mind what options are available to you if and when your circumstances change.
5. Do you have to be working to start a pension?
Yes, you must be in employment to start a pension.
6. Can you take a pension with you if you leave your job?
Your pension is for life – but your job needn’t be! There’s a variety of options open to you when you’re moving on from a position:
- Leave the pension pot where it is, and you will become a ‘deferred’ member. Your policy won’t receive any further contributions, but it will continue to invest in the fund(s).
- Transfer to a Pension Transfer Bond/Personal Retirement Bond. This is investing in an individual pension product.
- Transfer to your new employer’s pension scheme.
All three options should be carefully considered, particularly as there could be implications to transferring the pension policy; e.g. your current scheme may pay benefits that your new employers’ scheme does not.
7. What happens to your pension if you go on maternity/paternity leave?
If you’re contributing into a company pension, then it depends on your employer’s maternity/paternity leave process and if you’re getting paid leave. If it’s not paid leave, it’s unlikely that contributions will continue while you’re away – and even if it is paid leave, contributions may still cease for this period. However, if this occurs, you can continue to save in a PRSA, and tax relief remains available. You should request confirmation of the company process from HR well in advance of taking leave, to prepare for pension savings during this period.
8. What are the benefits to choosing a pension plan rather than a normal savings plan?
If the purpose of the savings plan is purely for retirement – meaning you won’t access the money in the short-term – then a pension is far more tax efficient. You’ll pay exit tax on any growth that your savings receive in a normal savings plan; that rate is currently 33%. Within your pension, savings grow tax-free, so the difference is considerable.
9. Does your employer have to contribute to your pension?
If they have a company pension scheme in place, then the answer is yes. If they don’t have a company pension in place then they’re not obliged to contribute to your own personal pension but need to provide you access to at least one standard PRSA – something their payroll has to facilitate.
10. How much are employer’s contributions?
An employer must make a 10% contribution over the lifetime of the scheme. It’s far more common for an employer to match the employee contribution up to a certain level; e.g. maximum matching contribution of 5%.
The final chapter, part three, sees Claire Louise tackle your questions on drawing your pension and how much money you’ll need. And, learn more about retirement bonds and why you should start one, so you understand the options available to you.