Introduction to pensions

A pension is a long term savings plan. Monies saved build up a retirement fund. This fund provides a source of regular money to live on in your retirement. It is one of the most tax efficient ways to save money.

When people are investing for the long term, it's important you have the freedom to choose how and where to invest your money - and the option to change your choice of investments you need or want to.

Most people need a pension because:

people are living longer: retirement could make up a third of your life.
They'll need money for their increased leisure time during retirement.

Types of pension

State pension

If you only had the state pension to live on, you probably will suffer a big drop in your income when you retire.
If you were to retire today, having qualified for a full basic State Pension on your PAYE contributions, you get: €193.30 per week for a single person under 80 years of age.

Personal Pensions/RACs (Retirement Annuity Contract)

A Retirement Annuity Contract "RAC" is the formal name for what is normally called a personal pension plan.
A personal pension plan is a particular type of insurance contract approved by the Revenue.
A Personal Pension Plan is a defined contribution pension plan. The value of the ultimate benefits payable from the contract depends on the level of contributions paid, the investment return achieved and the cost of buying the benefits.
You can take out a Personal Pension Plan if you have 'Net relevant earnings'.

PRSA (Personal Retirement Savings Account)

A PRSA is a new type of personal pension contract introduced in 2003. It is a contract between an individual and an authorised PRSA provider. It is a defined contribution plan.
You can use a PRSA to save for your retirement whether you are self-employed, employed or unwaged. If you are employed, your employer can also contribute to your PRSA.

Company pensions

An occupational pension scheme or as it is more commonly known as a company pension is set up under trust by an employer to provide benefits to employees when they reach retirement.
There are two types of company pensions, defined benefit and defined contribution.
Defined benefit schemes are pensions that provide you with an income that is related to your final salary and the number of years of service with that employer. This type of pension allows you predict your pension income, which is based on your salary and years of service.
Defined contribution schemes do not guarantee a percentage of your final salary at retirement. The pension depends on what the fund is worth when you retire. The factors that influence this include:

The amount of monies contributed by you and your employer
The performance of the fund during this period
Any charges or fees that the pension provider applies

The majority of employer pension schemes that are now set up in Ireland are defined contribution plans. This means that only an estimate of the final value of your pension can be made.

When you retire, the pension may be less than you expected. This means that you should review your benefit statement each year from the pension trustees and examine the contributions that you are making on a regular basis.

Click here to read more about pension products.

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