It’s that time of year again when the tax deadline looms. 31st October is the deadline for paper-based returns and 17th November for online returns to be made for self-assessed income tax for the 2020 tax year. Pension contributions are a big feature of these returns for many people, and this is one reason to review your pension today.
The tax benefits of pensions are extremely valuable
Pension contributions are one of the few remaining means of gaining marginal rate tax relief today. If you are in a position to make additional pension contributions, do this before the tax deadline and you can gain tax relief against your 2020 income. This would be one good use of the increased savings you put away during the pandemic! Give us a call and we can guide you as to any contribution limits that would apply to you.
Relying on the state won’t get you far in retirement
In Ireland, the state provides an old age pension to qualifying people. The maximum level of this pension is €248.30 per week for a single person – this is hardly going to deliver a lifestyle of luxury. Even at this, the state pension scheme is under extreme pressure. The ratio of people working compared to retired people will reduce from 5 to 1 today, to 2 working to 1 retired by 2050. There will be fewer people paying in and more seeking payment from the system*.
The plan was to address this by pushing out the state retirement age, but this was not implemented after becoming an election issue. With the challenges facing the state pension scheme, there is really only one likely outcome – the level of state benefits are very unlikely to increase. We all need to take control of our own pension planning, and the time to do so is right now.
Now is the time to take control
The longer you pay into your pension scheme, the more you can hope to receive when you retire, as you let increased contributions, time and compound interest get to work. We’re often asked how much you should pay in to your pension scheme. If possible, you should look to maximise the tax relief opportunities, but otherwise a very rough rule of thumb is that you should aim to save “half your age”. So for example if you are 40 years old, you should aim to save 20% of your income each year from now until retirement to build up a decent fund. If you wait until you are aged 50 to start, you should then aim to save 25% of your income each year. But this is only a very rough calculation. A full review of your pension circumstances will enable us to develop a far more tailored picture for you, taking account of any existing benefits that you have already built up.
Life expectancy is increasing
Savings in retirement will need to last on average for at least 20 years in retirement for female clients who are aged 66, and 17 years for males when they retire. Because of medical science and better diets etc., these periods are expected to increase. Indeed it is reckoned that the first person to live to be 150 years of age has already been born! While that is unlikely to be you, more and more people will now be retired for 30 - 35 years. What size of pension fund would you need to maintain your lifestyle for that period? This is another reason for a pension review now
Right now is the time to review your pension. Give us a call, we’ll be delighted to help.
*Sources: Irish Life, revenue.ie, gov.ie - National Risk Assessment 2019 & Health in Ireland Key Trends 2019 (JMS LIFE)
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