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We all know we need to plan ahead, whether it’s reserving a table at your favourite restaurant or ensuring you have a comfortable retirement. While many of us have ticked the box of setting up a pension, how many of us truly understand its performance and potential?
Just having a pension isn’t the endgame; ensuring it’s working hard enough for you and knowing it will give you the lifestyle you want in retirement is. It’s important to understand how pensions work, to be realistic about the retirement you want, and to assess if your current pension contributions will get you there. For this reason, let’s clarify the common pension misconceptions that I have seen throughout my years of experience:
- You have to retire at 65
Reality: Retirement age can vary. If you’re part of an employer pension scheme, you must follow the scheme’s rules and normal retirement age. However, if you’re self-employed, you can retire from a company pension between the ages of 60 and 70. If you leave an employer, you can retire as early as 50. - You must stop working when you retire
Reality: Retirement doesn’t necessarily mean you have to stop working. If you’re self-employed, you can claim your pension and continue working in your business. If you’re employed, it’s up to your employer’s discretion when you reach retirement age. - Pensions don’t make money
Reality: Pensions can grow significantly over time due to compound interest, which means you earn interest on both your initial savings and the interest that accumulates. This compounding effect can turn contributions into a substantial retirement fund. Additionally, contributing to your pension can provide personal tax relief, reducing the amount of taxes you pay. This makes saving for retirement even more beneficial. - You will always get taxed on the way out
Reality: Taxation on pensions can vary. Individuals can receive a tax-free lump sum of up to 25% of their pension, with a maximum limit of €200,000. Any amount exceeding €200,000 will be taxed at the standard rate, up to €500,000. Amounts above €500,000 will be taxed at your marginal rate. - They die with you
Reality: Pension benefits often continue after death. Most pension benefits are paid into your estate. If the pension is under trust, it’s paid out by the trustees, and a letter of wishes should be completed by the member. If you become seriously ill and are married, a PRSA is the best pension structure, as 100% will be paid to your spouse tax-free in the event of death. - You can only have one pension with your employer
Reality: There is no limit to the number of pensions you can have. While your employer’s pension scheme may offer limited fund options, you always have the option to open additional pensions with different providers and choose the type of product you want. You can have multiple pensions with different employers or even multiple pensions with the same employer. This flexibility allows you to diversify your retirement savings and tailor your pension plans to suit your financial goals. - You must use the default adviser
Reality: You have the freedom to choose your adviser. With Additional Voluntary Contributions (AVCs), you are not required to go with the default adviser provided by your employer.
Many people start a pension and then forget about it, but staying engaged is crucial to ensure your pension is working effectively for you.
To determine if your contributions will support your desired lifestyle in retirement, use our Pension Calculator and contact us for a review of your investment strategy.
Ensuring your pension is performing well is key to achieving the retirement you want. Feel free to reach out with any questions or for further assistance!