A pension plan is a long-term savings plan that helps you save for the future. A pension plan allows you to make regular payments and/or one-off lump sums into a fund for retirement.
Thankfully, due to many factors such as medical advancements and a healthier way of living, we are living longer than previous generations. In fact, most of us can now look forward to 20 – 30 years of retirement.
A pension can help you plan for these years, whether you want to retire early, travel, or spend time with your grandchildren.
Unlike a regular savings account, money invested in your pension can achieve valuable tax reliefs. Then, when you retire and access your pension fund, the benefits can generally be drawn down in a tax efficient way. Also, ongoing growth in your pension fund is not taxable.
The main types of pensions are as follows:
Personal Pension Plans
- Personal Pension – This is suitable if you are self-employed, or if your employer does not offer an occupational pension.
- PRSA Pension – This is a simple flexible pension which you can take out regardless of your employment status.
- Retirement Bond – This is suitable if you are changing jobs and wish to take your pension entitlements out of your previous employer’s scheme without having to transfer to your new employer’s scheme.
Additional Voluntary Contributions, or AVCs, are extra contributions you can make in addition to your existing occupational pension.
- AVCs give you the opportunity to grow your pension ahead of retirement, on your own terms.
- They’re tax efficient – you can claim tax relief against AVCs, subject to Revenue limits based on age and earnings.
Executive Pension Plans
An Executive Pension is a pension designed for company directors and owners such that company owners/directors working in and running SMEs can, subject to Revenue limits, direct company profits to his/her pension fund with the company benefitting from full corporation tax relief and with no income tax consequences arising to the company owner/director at the point of contribution.
A Company Pension – often referred to as a DC Pension or Occupational Pension – is a pension plan provided by an employer for its employees. In the hands of the employer, full income tax relief or corporation tax relief as the case may be is available on employer contributions, and the employee is generally not taxable on the employer contribution. Furthermore, the employee can benefit from income tax relief on his/her own contributions. While there is currently no binding requirement on employers to provide occupational pension schemes for staff, the availability of a pension scheme is fast becoming a requirement of employees in an ever more competitive recruitment market, so providing an occupational pension scheme, while certainly creating a cost centre, helps the employer to be as competitive as possible in terms of attracting and retaining the right quality of employee.
A Self-Directed Pension may be suitable for experienced investors, who want to manage their pension fund investments themselves. Such a pension gives access to invest in a wide range of assets, and should be considered a high-risk investment.