A beginner’s guide to pensions with financial expert Eoin McGee
July 13, 2021
When trying to get to grips with planning your pension, it can sometimes leave you feeling overwhelmed and unsure of where to start. You may be asking yourself, should I have a pension? Or, what type of pension do I have? Is it a defined contribution or defined benefit pension? How much can I put in and what are the benefits?
To help get you started, the CCPC has teamed up with financial expert, Eoin McGee, to create four new pension videos for beginners. Covering everything from compound interest to tax relief, each video is designed to simplify the basics of pensions to help you on the road to retirement planning.
What is compound interest?
Compound interest is the interest you earn on both the money you invest in your pension pot and on the interest that your pension pot earns. So you are earning interest on top of interest which allows your savings to grow faster over time.
What is a PRSA?
A Personal Retirement Savings Plan (PRSA) is a type of personal pension. However, unlike other types of personal pensions you do not have to be working to invest in a PRSA. Not all employers have an occupational pension scheme, although they are legally obliged to make a PRSA available to staff. Similar to an employee pension scheme, employees can avail of tax relief for investing in a PRSA. Click here for more information on PRSAs.
What is the difference between defined contribution and defined benefit?
Both a defined contribution and a defined benefit pension are types of occupational/employer pension schemes. Both schemes are set up by your employer. The value of a defined contribution pension depends on the amount of money you have invested (and your employer if they also contribute) and how the pension fund has performed over the years. The more money invested and the better the pension fund performs, the more money you will receive during retirement.
With a defined benefit pension the money you receive in retirement will be calculated using a formula that takes into account a number of factors, for example, your salary and length of employment. Although you make contributions to your pension, these contributions or the performance of the fund is not used in calculating your pension income.
All pensions are an investment and therefore no amount is 100% guaranteed. For further information on occupational pension schemes click here.
What are the tax benefits?
Contributing to your pension enables you to benefit now and in the future. How you benefit your future self is obvious, but how you benefit your current self is not something that many of us consider when thinking about pensions. When you contribute to your pension, you will receive tax relief at source on those contributions, within limits set out by Revenue.
Pensions are complex products and can be difficult to understand. However, they are a good way to save for your future and ensure you have enough money at retirement. So it is important to consider getting financial advice so you know what you are getting and ensure it is the right pension for you. Pensions are long-term investments so you need to be sure you understand the types of fund you’re investing in, the risks and the suitability for your particular situation.
Find out more about pensions here.
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