Insights

Your Income in Retirement: Where Will it Come From?

October 24, 2023
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Your Income in Retirement

People are living longer and healthier lives, and most would agree that’s it’s not their intention to work indefinitely. So, one of the most important questions you need to ask yourself is: "Where will my income in retirement come from?"

In the nineties, the Pensions Board (now the Pensions Authority), as part of the National Pensions Policy Initiative, categorised all retirement income into four distinct categories (pillars). The 'four pillars of retirement income' concept can serve as a useful tool for you to review the likely sources of pension assets/income in retirement and identify any potential gaps.

Pillar 1: State pension

For those who will be entirely dependent on the State old age pension, it is vitally important to understand that from 2028 it will probably only be payable from age 68. In addition, early retirement is not recognised at all by the State social welfare system. The maximum basic pension (currently €265.30 per week) is an income essentially designed for subsistence and not prosperity.

Pillar 2: Occupational and private pension provision

The Government provides an array of tax benefits to encourage people to fund private pensions. Despite some restrictions, no other savings or investment vehicle will give the contributor full tax relief at marginal rate (subject to limits), tax free returns on the fund, a tax-free cash lump sum at retirement and the ability to stagger an income in retirement to minimise the tax liability that applies on drawdown.

Pillar 3: Private assets

Whereas it is always a good idea to have a rainy-day fund, the problem with funding a pension with private investments is that more often than not, the asset is purchased with 'after tax' income. The taxation treatment of any gains or dividends or interest can also be quite penal, with DIRT tax now at 41%, marginal rate income tax at 40% and exit tax at 41%. Of course, capital gains tax also applies to the disposal of an asset if a gain is realised: yet another tax that has increased dramatically over the years, from 20% to 33%.

Pillar 4: Post retirement part-time and full-time employment

Many retirees may have no option but to continue working well into old age to maintain their standard of living. The necessity for Pillar 4 income will essentially depend on how strong the other pillars are. For example, in an ideal world where someone retires on a pension of two thirds of their final salary and qualifies for the old age pension, Pillar 4 may be entirely optional.

In summary

If we examine to what extent you have control over the income from these four pillars, one will have to say that control over the state pension is limited. Yes, you can ensure that your PRSI contributions continue, but changes may be introduced that are outside of your control, particularly as the state attempts to limit its long-term liability. 

With private assets, a fund or asset is difficult to accumulate in a tax efficient manner and as mentioned is almost always done with 'after tax' income anyway.

Part-time employment works great, strictly from a financial point of view, assuming one’s health and strength holds up but is hardly ever desirable, especially if it’s done out of financial necessity.

Compulsory occupational or private pension contributions may well be imposed on people in the years ahead as a mandatory approach is taken to improve pension coverage. Where affordability allows, the tax benefits of private pension funding are highly attractive, assuming the access restrictions are not too problematic. You should bear in mind that a rainy-day fund with easy access should be a priority in any event. All told, funding private pensions makes sense and funding a private pension by exploiting the many tax advantages should be carefully considered when deciding where income in retirement is likely to come from.

 

The Burren

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Important

This article is based on current pension rules, which are subject to change. Pension plans should be reviewed regularly. Independent advice should always be sought on pension planning. To claim income tax relief, you can apply to the Revenue to adjust your tax credits. Contributions deducted from salary will receive immediate tax relief. If you are self-employed, you must include your pension contributions in your self-assessment tax returns to obtain income tax relief.

Always seek the advice and support of your investment adviser before making any significant changes to your investment positions. 

This outlook and commentary do not constitute an offer and should not be taken as a recommendation from the author or Thomond Asset Management. Advice should always be sought from an appropriately qualified professional.

Warning

  1. The income you get from an investment may go down as well as up.
  2. The value of your investment may go down as well as up
  3. Benefits may be affected by changes in currency exchange rates
  4. past performance is not a reliable guide for future performance

Regulatory Status

Thomond Asset Management is regulated by the Central Bank of Ireland as an Investment Business Firm under Section 10 of the Investment Intermediaries Act, 1995 (as amended) and registered as an insurance, reinsurance or ancillary insurance intermediary under the European Union (Insurance Distributions, 2018).