Deciding when to retire—or whether to continue working—is a major life decision that requires careful financial planning. The age at which you hope to retire impacts how much you need to save and how long you have to build your retirement fund.
If you plan to retire before the State Contributory Pension begins, you’ll need to plan how to bridge the financial gap. The State Contributory Pension provides approximately €1,250 per month. While helpful, this amount alone is unlikely to provide a comfortable retirement. Therefore, it’s important to supplement your pension with personal savings and investments to ensure financial security.
Key Factors to Consider Before Retiring
- The current size of your retirement fund.
- The level of income you would prefer during your retirement years.
- Your age and state of health.
- Other assets at your disposal, including the State Pension.
- Your preference in relation to passing on your fund when you die.
- You should also consider your attitude to investment risk and what level of control you want.
You need to assess whether your retirement savings will support the lifestyle you desire. If your savings are lower than expected when planning for your retirement, then you should consider:
- Making Additional Voluntary Contributions (AVCs) to increase your pension fund in a tax-efficient way.
- Extending your working years to maximise contributions and savings.
- Exploring alternative income sources, such as rental properties or investments.
Choosing How to Receive Your Retirement Income
When you retire, you have different options for managing your pension income. The choice you make will depend on your financial goals, risk tolerance, and the level of control you want over your retirement funds.
Tax Free Lump Sum. One of the benefits of all retirement plans is the option to take a tax-free cash lump sum payment from your matured pension fund of 25% up to €200,000. The remaining balance can then be used to fund your retirement in the following three ways.
1) Guaranteed Income – Annuity (Income for Life)
- An Annuity guarantees a regular income for life, regardless of how long you live.
- There is no investment risk, as your payments are fixed and secure.
- Once purchased, an annuity cannot be altered, and funds cannot be passed on to family members after your passing (unless a specific provision is made).
2) Flexible Income – Approved Retirement Fund (ARF)
- With an Approved Retirement Fund (ARF), you reinvest your retirement savings with the goal of growing your fund over time.
- You have greater control over your investments and can make withdrawals when needed.
- Unlike an annuity, any remaining balance in your ARF can be left to your family when you pass away.
3) Taxable Lump Sum
- Immediate access to your full retirement savings but comes with significant tax obligations.
- You will be obliged to pay income tax at the marginal rate, the Universal Social Charge (USC) under the Pay As You Earn (PAYE) and Pay Related Social Insurance (PRSI) contributions if under age 66.
Seeking Professional Advice
Understanding your pension’s terms and potential outcomes is crucial for financial security. Consulting with us here at Derradda Financial Services is important so that you understand your retirement options.
Get in touch to find out how we can help.
📞Call us: Dublin Office 01 2330209 / Galway Office 091 399256
📧 Email us: info@derradda.ie