I was always unsure of how much income I would have when I actually retired. There seemed to be so many variables in there that determines one’s income after retirement. I must admit that it did cause me some anxiety, as I never really knew how much extra income I would need.
I finally got some time to sit down, do some research, and put some numbers into Excel. Here are my findings.
How much will I get from my private pension?
I will start with the usual – it depends. Of course there are many factors which will determine how much income you will get from your pension. What type of pension you have, public or private? Is it a defined contribution scheme or a defined benefit scheme? Or is it a PRSA? How much is in the pension?
Let’s just go with something simple for now, the private occupational pension. This is the pension that is set up by your employer if you work for a private company. The employer may be adding a percentage of your salary to it each month, or you may have to add a percentage of your salary so that the employer matches it, or you may also be adding Additional Voluntary Contributions (AVC) to it.
The simplest way to work out how much you will get from your private pension is to determine how much will be in there when you retire. Then, calculate 4% of the total amount. The reason you will be taken 4% out of your pension is because the revenue is going to tax 4% of your pension once you are 61 years of age or older. As they are taxing you 4% anyway, then it would make sense to take that 4% out of your pension.
Do I have to pay taxes on Pensions?
Yes. Once you retire you are classified as a self-employed person. You will be taxed on all your income including income from your pension. The income tax that you pay will be the same as what you would pay pre-retirement until you reach 65 years of age. After 65 years of age, you then get the first 18,000 tax free or 36,000 as a couple. PRSI is charged up until you are 66 years of age. And the temporary USC tax needs to be paid no matter how old you are; the upper bands of the USC decrease once you hit 70.
Related: See my other post, PLANNING FOR RETIREMENT, WHAT DO I NEED TO KNOW?, for more information on this
How much income will I have when I retire?
I done some research and got clarifications on my assumptions regarding occupational and state pensions. Note, this research is based on pensions in Ireland only.
I first looked at the occupational pension. I knew that a pension would be taxed at 4% per year from the age of 61, whether you withdraw that money or not. One thing I learned about finances and taxes is that you cannot assume anything – get everything clarified.
I needed to clarify that the pension would only be taxed once it had been transferred to an ARF or ARMF. I contacted my pension guy, he clarified that it only gets taxed if it had been transferred to an ARF or ARMF.
How long will your pension last?
Next, let’s see what growth rate we really get from pensions. I used my own pension for this one and the findings were surprising. The financial independence group chat also backed up my findings. My pension for the last five years had a growth rate of an average of 3% per year. Pretty poor considering we have been in a bull market for at least that many years. I’m going to use this growth rate to determine my ARF pension growth rate and how long it will last in my pension years.
The rest of the information was easy enough to find online;
- how much is state pension?
- At what age can I expect to start accessing state pension?
- Do I receive any state benefits prior to the state pension age?
- How much can I expect to get prior to state pension age?
- What taxes will I pay at each age group?
How much will I get from State Pension?
State pension is currently paid to those that are 66 years of age or older. However, that increases to 67 in 2021 and again to 68 in 2028. The maximum state pension that you receive at this time is €248.30 per week or €12,912 per year. That is based on contributions; see my related post PLANNING FOR RETIREMENT, WHAT DO I NEED TO KNOW? For more information on this.
I set up a Excel Sheet to pull all this information together. I added the pension information, pension withdrawal, investments pot and withdrawal, state pension, gross income, tax calculations, and then net income.
As you can see the ARF pension decrease in value every year because I have to take 4% out but it only grows at 3%.
I added some filtering information to make it easier to see the different scenarios. The ones highlighted in yellow are the main ones to change. Those highlighted in blue can also be changed but not as important as the yellow highlights.
Investments. If you don’t have any investments then set this to 0 (cell B4). If you have other income, you could just enter the revenue in cell B4 and then enter your withdrawal rate percentage in cell B7
I am assuming a growth of 6% on investments based on historical averages and fees of 0.6% based on ETF management fees.
Year Born & Retirement Year. These are mainly used to calculate taxes and when you will start receiving the State pension.
Ttl Pension on Retirement. Try to calculate how much your pension pot will be worth when you retire and enter the total amount in cell E4. The ARF fee is approximate based on a little research. I am assuming the growth rate will be something similar to pension growth rate.
Hope this helps to determine how much income you will have when you retire. You can also use it to determine how much pension pot you will need to meet your income needs.