Top tips for those retiring this year
- Make sure your pension provider has up to date details for you
It’s important that you ensure your pension administrator/provider has all your correct details as they will calculate your benefits. Imagine you are entitled to a pension lumpsum of 1.5.x times your final salary and your provider only has a note of your earnings from years ago, your lump sum would be based on that considerably lower figure.
- Employ a financial adviser
There are so many options available that you need someone to navigate your way through the complex network of incomprehensible acronyms – CPAs, ARFs, AMRFs are all relevant but how do you know which one is best for you? There’s a perception you can avoid fees and costs by not dealing with an intermediary, where the opposite may be equally true, you can cost yourself considerably more by not taking advice and by making the wrong decision or missing an option that you simply didn’t know about.
- Establish your State benefits
If you go onto www.welfare.ie you’ll find very useful and easy to read guidance on how to go about claiming your State Pension
For those with Defined contribution pensions:
Tip #1: Be familiar with your options
Did you know your pension lump sum can be calculated in one of two ways – (i) by a formula based on your salary and service that gives up to 1.5 times your salary or (ii) by reference to the value of your fund where you can take 25%. The first €200,000 of your pension lump sum is tax-free.
After taking the lump sum you have a choice of converting the remaining amount into an annuity or an approved retirement fund. Be aware that if you have taken a lump sum based on the 1.5 times, rule you are obliged to use the remainder of the fund to buy an annuity An annuity is a fixed income for life based on long term interest rates (at an all-time post WWII low ).
Tip #2 Think about what happens should you die. An ARF can pass onto your spouse whereas a single life annuity dies with you – don’t find out too late.
Tip #3 Think about inflation. Many people invest in ‘level’ annuities i.e. they get a flat amount of income in return for their fund. An annuity of €10,000 will lose over 30% of its buying power in 10 years if inflation runs at 3% p.a.
For those with defined benefit schemes:
Tip #1 Make sure your lump sum is calculated in the most advantageous way
Your pension lump sum from a defined benefit scheme is based on your salary and service and can be up to 1.5 times your ‘final remuneration’. It’s critical that you ensure your administrator uses the highest possible figure – imagine you earn €30.000 as salary and you get commission of €30,000 on average. The correct 1.5 times lump sum is €90,000, not €45,000.
Tip #2 Don’t sell your annual pension income for a lump sum
This is definitely one where advice is needed. In most private sector defined benefit schemes retiring employees are allowed to exchange a portion of their annual pension income for a lump sum. The problem is the ‘exchange rate’ is very unfavourable to you, for example, most schemes exchange €1 worth of pension income for €9 worth of lump sum, so if you sacrifice €1,000 of your annual pension you could get €9,000 in a lump sum. However the cost of €1,000 worth of annual income for a 65 year old is closer to €20,000 so it is very bad value.