How to start a pension

For every eight years we defer starting our pension, we could be reducing our future benefits by a half. It’s important to start early. 

For every eight years we defer starting our pension, we could be reducing our future pension benefits by around a half, compared with starting that pension today. And with many people now living for several decades in retirement, it really is common sense to make sure your pension pot is as big as possible, so that you enjoy a long, comfortable and worry-free retirement.

There are attractive tax concessions available too for contributions made to an approved pension plan, so it does make sense to start sooner, rather than later.

Types of pension

There are several different types of pensions, and it is useful to understand the relevance and importance of each to our individual circumstances. The main types of pension are:

State old age pension

There are two types of state old age pension. You can only qualify for one of these, not both.

The first, the contributory state pension, is paid to those who have paid the appropriate amount of Pay Related Social Insurance (PRSI) contributions during their working lives. The second, the non-contributory pension, is paid to those who have passed a means test, showing that they have limited financial resources.

The maximum contributory pension (for a single person) stood at just over €230 a week and €219 a week for a non-contributory pension in 2015.  So imagine how far that would stretch in retirement.

Private pensions

There are several different types of private pension plan, including:

  • Personal retirement savings account (PRSA). This is a retirement savings account with an insurance company or an investment firm, for self-employed people, and for employees not covered under an occupational pension scheme.
  • Personal pension plan. A personally owned pension plan, provided by an insurance company usually to a self-employed person or someone not covered under an occupational pension scheme.
  • Occupational pension scheme. This is a scheme sponsored by an employer, for some or all employees.
  • Additional voluntary contributions (AVCs). These are additional contributions made by an employee who is covered by an occupational pension scheme, to provide additional retirement benefits at the employee’s expense.

Other sources of income for you in retirement could include the business that has been built up by you, other private investments and savings, as well as any income you plan to earn by working after retirement.

Any earnings from these sources will not affect eligibility for the contributory state pension in retirement, but your eligibility for a non-contributory pension may be affected, owing to the means testing involved.

3 Action Points

  • Start your pension planning early: by any measure, this makes financial sense.
  • Understand the tax aspects of pensions
  • Decide which pension plan best suits you: try to understand more about different forms of private pensions and the rules that apply.  Before you make a decision, though, seek help from your bank or financial intermediary.