Financial Planning – Retirement Planning


According to a recent report commissioned by the government (The report was drafted by audit firm KPMG and was completed in June but has yet to be published. source Irish Times). the social insurance fund may not be adequately funded into the future and may have a massive deficit (by 2066) if nothing is done about it.

The social insurance fund is made up of prsi contributions.  These contributions have been falling in recent years due to job losses and falling wages.  Together with higher levels of people retiring and longevity of those pensioners the social insurance fund has gone into deficit. The deficit is now being funded by tax revenue.

So it is a story we already really know, or should do at least as it has being highlighted by Joan Burton TD for the last number of years. The difference this year is that something will probably be done about it as the pressure from the IMF and Europe to make ends meet seems to be increasing.

What will this mean for us the taxpayers? It could mean increased PRSI rates which would be another cost to employees and businesses. However it could also mean that future benefits could be reduced. One of the items that could be cut is the contributory pension. At present the maximum pension for a retired individual is €230.30. An additional payment can be made for a qualified adult (spouse) for an amount of €206.3. The annual income from these benefits work out at €11,975.60 and €10,727.6 respectively.

Some people might be able to live on this and more and more are having too. However if it reduces in the future it might make it a lot harder for pensioners to survive. It is obviously too late for pensioners to start pension planning.

However for those in their early work years or with at least 5-10 years to retirement age some simple retirement planning could help you supplement the income provided by the State.

An example might illustrate the point.

Take 4 people at different ages, 35, 45, 55 and 60. All are employees / self employed and so are able to make contributions in line with their age related pension contribution tax limit.

These limits are as follows:


under 30 – 15%

30 – 39        20%

40 – 49       25%

50 – 54       30%

55 – 59       35%

60 +          40%

Based on salaries below at the ages outlined the following is the maximum annual contirbution to a pension fund:

Age                 Salary                       Maximum Contribution

35                    €30,000                   €6,000

45                    €35,000                   €8,750

55                    €40,000                   €14,000

60                    €45,000                   €18,000

I have assumed the salary stays the same throughout the period to retirement & the maximum contributions are made each year. The example uses a return amount of 4% per annum net of charges and inflation in the example is 2%. The following are the fund values for each individual at retirement age of 68.

Individual Start Age           Fund Value at Age 68

35                                          €203,594

45                                          €205,242

55                                          €184,094

60                                         €145,062

The income this would provide per annum would depend on many things like the investment choice, whether tax free lump sum was taken etc.

Ignoring the tax free lump sum available and assuming the fund was used to purchase an annuity at the current rates (with 10 year guarantee & annuity rate of 5.69%, assuming male individual 68.5 years of age) the following income could be achieved to supplement the retirement income:

Individual Start Age           Income Provided from Pension Fund

(per annum)

35                                          €11,546

45                                          €11,640.5

55                                          €10,437

60                                          €8,216

The main thing to note from the above is the value of putting funds aside for the “retirement rainy day”. There are many ways to accumulate funds for retirement. The above is one of them by accumulating the funds in a pension fund which allows tax free growth on investment. The tax free lump sum available has been ignored in the above example because it would have achieved very different results for each of the individuals and there are some different options available. This is a topic I will return to in a later blog.

For any queries on pension / retirement planning contact us today at 087-1202405.

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