Planning for Retirement, what do I need to know?

• What taxes will I need to pay?
• What are pension contributions and how do I calculate how many I have?
• What happens to my occupational pension when I retire?
• What other Free benefits / Allowances will I receive when I retire?
• What about medical insurance / healthcare costs ?
• How much state pension will I get?

What are you going to do when you retire?

One of the most important things about retirement is that you need to plan for it. Most people think that they have a ton of things that they want/need to do; fix this and that in the house, work on my golf game, travel, see family, read, etc… but what happens when they are done or they find that they can’t or don’t want to do those things any longer. That is why we need a plan.

What is the purpose of your retirement? why do you want to retire? write down your answer and keep it some place where you can see it on a regular basis (daily). This will give you outline and a potential road map for what your goals should be. Of course, goals change all the time, so this should be reviewed and updated on an annual basis.

If you have problems prior to retirement, you will still have them after retirement. They will not suddenly be solved just because you are retired. If your investment strategy is not doing well now, it probably won’t do well after you retire. If you are not volunteering now and helping others, you probably won’t do it after retirement either; start trialing what you want to do now – go out an volunteer or work on your investment strategy. If you don’t have any friend’s now, you are not just going to automatically make friends with people on retirement. If your relationship with your spouse or partner is not good now, it won’t miraculously get better after you retire. This is a good time to sort out any issues that you have prior to retirement.

In order to plan for your retirement, it is vital that you gather as much information about your retirement as possible. The following will hopefully, answer some of your questions.  

What tax will I pay when I retire?

• If you are 66 years or older, you no longer have to pay PRSI
• Property Tax, can be deducted at source from your state pension
• Any income of more than €18,000 for individuals that are age 65 or more will be taxed as income.
• Once you pass the tax-free income threshold, any other income (including occupational pension) and the state pension are added together to determine how much tax to pay.

What state pension will I receive when I retire?

At this time (2019), the state pension is paid to people age 66 or over. This will increase to 67 by 2021 and again to 68 by 2028. The amount that you will receive from state pension will be based on the PRSI contributions that you have paid in. The contributory state pension is not means tested but it is taxable.

If you don’t qualify of the contributory state pension, there is a non-contributory state pension which is means-tested. The non-contributory state pension will pay you less than the contributory pension.

What are pension contributions and how do I calculate how many I have?

Pension contributions are the PRSI deductions from your PAYE income or self-employment income. Once you reach the age of 66, you no longer need to pay PRSI contributions.

You need to have a minimum of 520 full-rate contributions or 10 years of contributions working full-time to qualify for the minimum contributory state pension. Each week that you work and pay PRSI is equal to one pension contribution.

You need a yearly average of 48 contributions from 1979 or first year of taxed income to retirement age of 66 to get the maximum contributory state pension. You need a yearly average of 10 contributions from 1953 or first year of taxed income to retirement age of 66 to get the minimum pension rate or about 14 years of full-time work. 
Source

The homemakers scheme that was introduced in 1994, allows for gaps in contributions for providing full-time care to a child under 12 years of age or an incapacitated person. The Home Caring scheme seems to provide something similar. With the home caring scheme, you cannot have earned more than €38/week, must not be in receipt of social welfare, provide full-time care for a child under 12 years of age or an incapacitated person, or an adult needing increased level of care, and born after Sept 1, 1946.  

What additional costs will I incur when I retire?

I had a conversation with someone that had retired early about his current lifestyle. One of the things that he found surprising after he quit his job was that his expenses drastically decreased. He no longer had to maintain a car to get to work, he did not have to buy lunch at work, and he was able to move down the country where house prices are cheaper. The only additional costs that he had was health insurance.  

What happens to my occupational pension when I retire?

You have two choices; you can either transfer the occupational pension into an Approved Retirement Fund (ARF) or an Annuity. But before you do that, you can take a tax-free lump sum from your occupational pension up to 25% of you total pension pot or a maximum of €200,000.

You can also use a combination of an ARF and Annuity in order to maximize your payouts and to mitigate any market volatility. Food for thought would be to buy an annuity that would cover your mandatory expenses each year. Then the income from the ARF would be used for discretionary expenses.

Approved Retirement Fund (ARF)

An ARF is similar to the occupational pension scheme in that funds will be invested in assets and continue to grow. Upon death, your spouse or family members can inherit the ARF. You have some control over which assets that fund invests but a qualified fund manager (QFM) must manage it.

You get to choose how much income you want to take out of the fund each year. It would make sense to stick with the 4% safe withdrawal rate so that the fund will continue to grow.

An ARF is exempt from capital gains tax or income tax while the funds are retained in the ARF. However, once you withdraw funds you may have to pay tax.

The main difference between an occupational pension scheme and an ARF is that an ARF has a mandatory tax of 4% of the fund per year whether you withdraw the funds or not. Tax is due on the income from an ARF if you are over the income threshold. Upon death, the ARF can be moved to your spouse’s ARF which is exempt of tax.

The ARF must provide at least €12,700 per year for life. If it does not reach that income threshold then €63,500 must be put into an Approved Minimum Retirement Fund (AMRF) then an ARF can be purchased. You can draw down an income from the AMRF after the age of 75.

Annuity

An annuity is a service provided that will guarantee you an income for life in exchange for your pension pot. An Annuity will pay you around 3% of you pension per year, but shop around as these rates are competitive.
Payout examples based on 4% payout:

Upon death, your pension pot dies with you. You do not leave a legacy for your children or family members. However, there are options when purchasing an annuity; for example, guarantee period provides payouts to your spouse or estate after your death for a specific period. Of course, these additional options will normally decrease monthly payments. 

What other benefits / Allowances will I receive?

Free Travel

Free travel to everyone that is age 66 or over. You will be issued a Free Travel card that you must carry with you to get free travel. It is also possible to get a Free Travel Companion card if you are unable to travel alone.

Again, there are exceptions to this. For example, if you are not permanently living in Ireland then you are not entitled to a Free Travel card.  

Electric / Gas / T.V. License Allowance

If you are over 70, you can get the Household Benefits package that is an allowance towards either household electric or gas bill (bottled gas included) and T.V. license. This is not means-tested.

If you are between 66 and 70, you are also entitled to this allowance if you are getting state pension, widow/widower’s pension, civil partner’s pension, deserted wife’s benefit, and a few others. It is also possible to get it if you are under 66 years of age. See here for full details

The allowance provides €35 per month for electricity or gas bill and you get a free T.V. license.

Fuel Allowance

66 years of age or over.  Fuel allowance is paid during the winter months from Sept through to April. It is a means-test allowance; there are minimum income levels and savings. You are eligible for it if you are getting state pension, meaning if you are 66 years of age or over (increasing to 68 by 2028) and you live alone or with your spouse who cannot provide for the heating needs from their resources. 

You can get a lump-sum payment of €315 for the season or €22.50 per week.

Living Alone Allowance

If you are over 66 years of age, getting a state pension, and you are living alone then you qualify for living alone allowance. An extension of a family member’s home (i.e. granny flat) and you have the facilities to cook, eat, and sleep does qualify as living alone.

This allowance pays and additional €9 per week.

Adult Dependent Allowance

The dependent adult must be a spouse, co-habitant or civil partner and cannot have a gross weekly income of more than €310.

Under 66 years old, the adult dependent allowance would €165.40 maximum and over 66 years old it would pay an additional amount of €222.50 maximum. The payout is determined based on how much the dependent adult earns.

What medical insurance / healthcare costs will I need?

Medical card holders benefit from free medical and dental services from the HSE. The medical card is means-tested which depends on if you are under or over 70 years of age.

If you are not a medical card holder, it is recommended that you get health insurance when you retire as that is when you will need it most. The older we get the more likely we will be paying a visit to the doctor or hospital. We don’t want such charges to clean out our bank account or investments. At this time, Laya Healthcare is providing insurance for €116 per month that has 300 excess for hospital admission and medium cover of everday expenses.

Dental insurance will set you back about €30 per month. I am not 100% convinced that this is worth it. If you are over 66 years old and you have 260 contributions, you will get a dental checkup for free through the treatment benefit scheme.

. If you are over 66 years old and you have 260 contributions, you will get a free eyesight checkup every two years for free through the treatment benefit scheme.

How much state pension will I get?

The amount of state pension that you will be entitled to is calculated using your average contributions per year.

To calculate the average yearly contributions, count the number of years that you first starting paying contributions to the year before you reach 66. Yearly average is the sum of contributions plus credits divided by total contribution years

You must have at least an average of 48 contributions or credit social insurance contributions per year to get the maximum pension rate.

How much will I get if I am on a Defined Benefit Scheme?

Government or public entity usually provides these schemes for their employees.

You will receive a monthly payment on a Defined benefit schemes that will be defined by the scheme. It is usually a formula based on your final salary and the length of service. You may also have the option to take a lump sum payment in exchange for a lower monthly payment unless you have contributed additional payments to the scheme (AVCs).

Normally, you will receive 1/60^th of your salary for each year that you worked. For example, let’s say you worked for 30 years for the same employer and normal retirement age is 66. In this case, you would get 30/60^th of your final salary or 50%. If your final salary was €60,000 then you would receive €30,000 for life. This is a very general calculation for example purposes only. The calculation is a lot more complicated than this.