Personal pensions
What is a personal pension and how do you choose the right one?
A personal pension is a long-term savings plan for your retirement. You pay money in regularly or as a lump sum. That money is then invested to (hopefully) grow over time, building up a pot of money for when you retire.
The two main types are the Personal Retirement Savings Account (PRSA) and the Personal Pension Plan (PPP). PRSAs are available to everyone, while PPPs are for self-employed people or employees without an occupational (work-based) scheme.
When choosing a personal pension, compare charges, investment options and the level of risk. At retirement, you can usually take a tax-free lump sum and choose to invest the rest in an Approved Retirement Fund (ARF), buy an annuity or take it as a taxable lump sum. Always get independent financial advice before signing up.
What types of personal pensions are available in Ireland?
There are two main types:
- Personal Retirement Savings Account (PRSA): Available to anyone. If your employer doesn’t offer a work-based pension, they must give you access to a Standard PRSA.
- Personal Pension Plan (PPP): For self-employed people or employees without a work-based pension. You need to have a taxable income to get one.
Personal Retirement Savings Account (PRSA)
A Personal Retirement Savings Account (PRSA) is a type of personal pension plan. It works like an investment account that you use to save for retirement. You may be able to claim tax relief on the money you pay into a PRSA, within certain limits. You can take out a PRSA even if you are not earning an income or paying tax, but you generally need taxable income to benefit from tax relief on contributions.
If your employer does not offer an occupational pension scheme, they must provide employees with access to at least one Standard PRSA. PRSAs can be especially useful for self-employed people and employees without a work-based pension. While you can open a PRSA without taxable income, tax relief on contributions is linked to having taxable income, within certain limits.
What are the key differences between standard and non-standard PRSAs?
- Standard PRSA: There is a maximum charge set, and there are limited investment funds.
- Non-standard PRSA: There is no maximum charge set, and there are more investment funds available.
All PRSAs are regulated by the Pensions Authority. Visit the Pensions Authority website for more information on PRSAs.
What age can you retire or take the benefits from your PRSA fund?
You can normally access your PRSA benefits anytime between age 60 and 75, or earlier if you retire from employment at age 50 or over. The choices available at retirement are the same as for a Personal Pension Plan (PPP), including:
- Taking a tax-free lump sum (up to 25% of your fund, subject to lifetime limits)
- Buying an annuity (taxed as income)
- Investing in an Approved Retirement Fund (ARF) (withdrawals taxed as income)
The options available to you at retirement are the same as those for Personal Pension Plan (PPP).
Who can take out a PPP?
A PPP can be taken out by:
- Someone who is self-employed
- Employees who cannot access an occupational pension scheme
To take out a PPP you will have to be earning an income which is taxable in the current tax year.
Where can you take out a PPP?
- Shop around to give yourself the widest choice and take your time to get as much information as you can before you decide.
- Make sure you get and carefully read the Disclosure Notice document (sometimes called a Key Features Document). This document sets out all the important facts about the PPP. This must be given to you by the insurance company or broker before you sign into a PPP.
- Make sure you can afford the contributions as some PPPs have a minimum payment.
- Check what charges and costs you will have to pay and when. Examples of some of the charges are set up, allocation rate, bid/offer, fund management, fund switching, etc. Many of the charges will be deducted from your fund and will affect the value of your pension.
- Make sure you are happy with how your contributions are going to be invested and that you are happy with the level of risk you are taking.
- PPPs can be complicated so it is recommended that you get independent financial advice.
- Do not sign any documentation until you understand clearly and are happy with your choice.
How much will it cost?
All PPPs will have various charges, and they will be set out in your Disclosure Notice document. The following are some of the charges that you may have to pay at the start and during the life of your PPP.
Setup:
This charge is to set up the PPP and will be taken from your regular payments. It is typically taken for six months to one year, but you will need to refer to your disclosure notice document to check this.
Allocation rate:
The percentage of your payment that is used to buy units in a fund. A 98% allocation rate means that for every €100 you invest, the insurance company invests €98 and takes €2 as a charge.
Bid/offer spread:
This cost is made up from the difference between the price you buy and sell units in a fund. If the difference is 5%, it means that €5 out of every €100 used to buy units is taken off as a charge. As a result, the value of a €100 investment would fall to €95. This charge is a feature of older contracts from before 2005.
Fund management:
This is a set percentage of the value of your investment fund that is taken by the provider each year to pay for managing the fund and other general costs. It typically ranges from 1% to 1.5% of the value of your fund.
Early encashment:
This is a fee you may be charged for any money you withdraw in the first few years. This charge is highest in the first year and reduces every year after that. Generally, there will be no charges after five years.
Fund switching:
Some PPPs charge a fee if you decide to switch units from one fund to another.
How are your contributions invested?
Insurance companies invest your money in funds such as shares and equity funds, government bonds, property or cash funds. Returns are not guaranteed and charges are deducted from your fund.
How can you boost your pension?
If you think that your projected pension fund may not be enough to meet your needs and wants in retirement, you should look at ways to boost your pension. If you have a PRSA or a PPP, you can increase your contributions. For example, you could consider contributing any increases in your salary to your existing pension.
If you can afford it, you should try maxing your contributions to avail of the maximum tax relief available to you. Learn more about tax relief on pensions.
What age can you retire or take benefits from your PPP?
When you retire, if your Personal Pension Plan (PPP) has performed well, you’ll have built up a lump sum from your regular payments and any investment growth, minus charges. However, if your investments haven’t grown, you could end up with less than you paid in.
You can access your pension fund in the following circumstances:
- From age 60 up to age 75: You don’t have to retire or stop working to take benefits from your PPP. You simply need to be over 60 and under 75.
- Serious ill health: At any age, if you become permanently unable to work due to serious illness, you may be able to access your pension early.
- Certain occupations: If you work in a profession where people typically retire before age 60 (for example, a golfer, rugby player, or jockey), you may be able to access your pension from age 50.
What are your options at retirement?
- Take a tax-free lump sum of 25% (up to €200,000).
- Invest the remainder in an Approved Retirement Fund (ARF), buy an annuity, or take it as a taxable lump sum.
- Retirement benefits can be accessed from age 60, or earlier in cases of serious ill health or certain occupations.
What happens if you die before taking your benefits?
The value of your PPP fund is paid into your estate.
Post-retirement products
What is an annuity?
An annuity is a financial product sold by insurance companies. You use a cash lump sum from your pension fund to buy an annuity, and in return, the insurance company guarantees to pay you a regular income for the rest of your life. This income is taxable.
You don’t have to buy your annuity from the same company that managed your PPP, so it’s worth shopping around for the best rate. Annuities can include a guarantee period (up to 10 years), meaning if you die soon after retirement, the income will continue to be paid to your estate for the remainder of the guarantee period.
Example:
Tim has just retired with €200,000 in his PPP fund. After comparing offers, he chooses an annuity that pays €8,000 per year with a 5-year guarantee. If Tim dies after 2 years, the insurance company will continue to pay €8,000 per year to his estate for the next 3 years.
What is an Approved Retirement Fund (ARF)?
An ARF is an investment plan that lets you keep your pension fund invested after retirement and withdraw money as you need it, instead of buying an annuity. You must withdraw at least 4% of the ARF’s value each year up to age 70, and at least 5% per year after that.
Can you transfer your PPP to another pension plan?
PPPs bought since 6 April 1999 can be transferred to another PPP. They can also be transferred to a Personal Retirement Savings Account (PRSA), but only if the provider operating the PPP allows for it.
What information should you get from your insurance company/broker?
Disclosure notice
Before you sign up for a Personal Pension Plan (PPP), you must be given a disclosure notice. This document helps you decide if the PPP is right for you and includes details such as:
- The possible changes that could be made to your plan
- The charges you may have to pay to the insurance company
- The benefits your PPP could provide at retirement
When you take out a PPP, you’ll receive a personalised table showing the likely benefits and charges. This table should also highlight your right to a 30-day cooling-off period from the date you receive your PPP policy or the date it is posted to you.
Annual statement of value
For PPPs taken out after 1 February 2001, your insurance company must send you an annual statement showing:
- The current premium you are paying
- The current surrender or maturity value of your plan
- Any other relevant information the insurance company considers necessary
What if you stop contributing to your pension?
If you stop contributing to your personal pension, your existing pension pot will remain invested, but you won’t build up any new savings or receive further tax relief on contributions.
The value of your pension can still go up or down depending on investment performance and charges. You can usually leave your pension invested until you decide to start contributing again or until you reach retirement age, when you can access your benefits.
If you’re thinking about stopping contributions, it’s a good idea to talk to your provider or a financial adviser to understand the impact on your retirement plans.
What is the impact of inflation and market changes on your pension pot?
The value of your pension can be affected by inflation and changes in the financial markets. Inflation means that the cost of living rises over time, so your pension savings may not stretch as far in the future if your investments don’t grow enough to keep up.
Market changes can also cause the value of your pension fund to go up or down, depending on how your money is invested. That’s why it’s important to review your pension regularly and consider how your investments are performing.
