Brendan Burgess
Founder
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- 52,115
Thanks to the many contributors whose work I have plagiarized, and in particular – AJAPale, Conan,D53,Alan Moore & Homer
Corrections and comments welcome
In a Defined Contribution Scheme, you and your employer contribute a defined percentage of your salary to a pension fund. On retirement, the fund is used to the fund is used to provide income in retirement. The size of the fund on retirement will be determined by how much was contributed to the scheme and by the investment return achieved.
By comparison, a Defined Benefit Scheme is one which guarantees you a defined benefit e.g. 2/3rds of salary on retirement.
AVCs – Additional Voluntary Contributions
If you want to increase the size of the fund on retirement, you can make AVCs.
Broadly speaking, you get tax relief on AVCs each year up to the following percentages of your salary:
Under 30 - 15%
Under 40 - 20%
Under 50 - 25%
Over 50 - 30%
If you are aged under 30 and contributing 5% of your salary as part of the normal pension scheme, you will be able to get tax relief on an extra 10% of your salary.
What’s the significance of 31 October for AVCs ?
If you make an AVC (strictly speaking, a special employee contribution) on or before 31 October and choose to designate it as backdated to the previous tax year, you will be eligible to claim a refund of tax paid for the previous tax year.
Where should I invest my pension scheme money?
Your pension scheme should allow you a choice of where to invest your money – typically 100% equities, 100% bonds or a mix of equities and bonds.
You should invest 100% in equities when you are younger as equities are expected to outperform over the longer term. However,equities can fall and they can plummet and you must be comfortable with this.
The traditional view is that you should gradually switch to bonds as you approach retirement. On retirement, you must buy an annuity, and if the stockmarket is at a low, you will get a smaller annuity. I don’t fully agree with this. You should consider whether you are prepared to risk a reduced annuity in favour of the probability of a higher annuity. If you can afford the risk, then it is worth taking.
How much do I need to invest to get an adequate pension?
Eagle Star has provided the following figures:
If you start contributing 20% of your salary at age 30, you will get a pension of 36% of your final salary when you retire at aged 65.
If you wait unitl you are 40, you will get only 26% of your final salary.
But, a pension should form just one part of your overall financial planning. You should not look at it in isolation. Your total wealth includes your home and any other investments. (Note that many commentators disagree with the idea that you should include your home as part of your financial planning) Financial advisors suggest that you should fund your pension so that it provides 2/3rds of your salary when your retire. This is fine as long as you have plenty of spare money to invest. But it is a big mistake to scrimp and save now because you are afraid of retiring in poverty. Try to get a balance between scrimping and saving and squandering your money.
Buying your own home is an important part of long term financial planning. Do not over contribute to a pension until you have bought your own home and until you have your mortgage down to a comfortable level. It’s no use having a fantastic pension fund, if you can’t manage your mortgage repayments.
Contributing to an SSIA also makes more sense than contributing to a pension fund.
What happens if I leave employment?
If you have been in the scheme for more than 2 years…
You can leave it there and it should grow in value over time.
You can transfer it to your new employer’s pensions scheme
You can transfer it to a Buy Out Bond
You can theoretically transfer it to a PRSA, although few PRSAs will take in transfers.
What does “vesting period” mean?
Each pension scheme has a vesting period up to a maximum of 2 years. If you are in the fund for the full vesting period, your employer is obliged to give you the full benefit of both your contributions and your employer’s contributions when you leave. If you leave before the vesting period, your employer is only obliged to refund you your contributions. These will be paid directly to you less a 20% deduction for tax.
The vesting period is not the amount of time you have been employed by the company. It is the amount of time during which you have been a member of the pension scheme. If you have transferred in a value from a previous pension scheme, your vesting period will be reduced.
Where can I get more information about my pension?Your employer should provide you with a booklet summarising the scheme. There should also be a more detailed set of rules available. There should also be a firm of pension advisors who advise you on your rights and entitlements under the scheme. Many companies have knowledgeable HR and Payroll staff who may be able to answer your questions in an informal fashion. Also, Trade Unions have often negotiated the pension benefits can be helpful. Some companies allow direct access by their employees their pensions advisors. Some companies may include pension information in their new employee induction pack. A small number of companies may have pension information on their company Intranet.
What happens when I retire?
First of all, you will be entitled to a tax-free lump sum. The maximum lump sum at normal retirement age is 1.5 times your final salary if you have had 20 years service. (exception:If you are a 5% proprietary diector, you can have 25% of the fund instead)If you retire early or have less than 20 years service, you will be entitled to a lower lump sum.
The balance must be used to buy an annuity. An annuity is provided by a pension company. You give them the pension fund and they give you a monthly pension for the rest of your life. If you die early, the life company gains. If you live for a long time, the life company loses out. They take the longevity risk.
If you have made Additional Voluntary Contributions, you may move them into an Approved Retirement Fund (ARF) or Approved Minimum Retirement Fund.
Some interesting posts
Corrections and comments welcome
In a Defined Contribution Scheme, you and your employer contribute a defined percentage of your salary to a pension fund. On retirement, the fund is used to the fund is used to provide income in retirement. The size of the fund on retirement will be determined by how much was contributed to the scheme and by the investment return achieved.
By comparison, a Defined Benefit Scheme is one which guarantees you a defined benefit e.g. 2/3rds of salary on retirement.
AVCs – Additional Voluntary Contributions
If you want to increase the size of the fund on retirement, you can make AVCs.
Broadly speaking, you get tax relief on AVCs each year up to the following percentages of your salary:
Under 30 - 15%
Under 40 - 20%
Under 50 - 25%
Over 50 - 30%
If you are aged under 30 and contributing 5% of your salary as part of the normal pension scheme, you will be able to get tax relief on an extra 10% of your salary.
What’s the significance of 31 October for AVCs ?
If you make an AVC (strictly speaking, a special employee contribution) on or before 31 October and choose to designate it as backdated to the previous tax year, you will be eligible to claim a refund of tax paid for the previous tax year.
Where should I invest my pension scheme money?
Your pension scheme should allow you a choice of where to invest your money – typically 100% equities, 100% bonds or a mix of equities and bonds.
You should invest 100% in equities when you are younger as equities are expected to outperform over the longer term. However,equities can fall and they can plummet and you must be comfortable with this.
The traditional view is that you should gradually switch to bonds as you approach retirement. On retirement, you must buy an annuity, and if the stockmarket is at a low, you will get a smaller annuity. I don’t fully agree with this. You should consider whether you are prepared to risk a reduced annuity in favour of the probability of a higher annuity. If you can afford the risk, then it is worth taking.
How much do I need to invest to get an adequate pension?
Eagle Star has provided the following figures:
If you start contributing 20% of your salary at age 30, you will get a pension of 36% of your final salary when you retire at aged 65.
If you wait unitl you are 40, you will get only 26% of your final salary.
But, a pension should form just one part of your overall financial planning. You should not look at it in isolation. Your total wealth includes your home and any other investments. (Note that many commentators disagree with the idea that you should include your home as part of your financial planning) Financial advisors suggest that you should fund your pension so that it provides 2/3rds of your salary when your retire. This is fine as long as you have plenty of spare money to invest. But it is a big mistake to scrimp and save now because you are afraid of retiring in poverty. Try to get a balance between scrimping and saving and squandering your money.
Buying your own home is an important part of long term financial planning. Do not over contribute to a pension until you have bought your own home and until you have your mortgage down to a comfortable level. It’s no use having a fantastic pension fund, if you can’t manage your mortgage repayments.
Contributing to an SSIA also makes more sense than contributing to a pension fund.
What happens if I leave employment?
If you have been in the scheme for more than 2 years…
You can leave it there and it should grow in value over time.
You can transfer it to your new employer’s pensions scheme
You can transfer it to a Buy Out Bond
You can theoretically transfer it to a PRSA, although few PRSAs will take in transfers.
What does “vesting period” mean?
Each pension scheme has a vesting period up to a maximum of 2 years. If you are in the fund for the full vesting period, your employer is obliged to give you the full benefit of both your contributions and your employer’s contributions when you leave. If you leave before the vesting period, your employer is only obliged to refund you your contributions. These will be paid directly to you less a 20% deduction for tax.
The vesting period is not the amount of time you have been employed by the company. It is the amount of time during which you have been a member of the pension scheme. If you have transferred in a value from a previous pension scheme, your vesting period will be reduced.
Where can I get more information about my pension?Your employer should provide you with a booklet summarising the scheme. There should also be a more detailed set of rules available. There should also be a firm of pension advisors who advise you on your rights and entitlements under the scheme. Many companies have knowledgeable HR and Payroll staff who may be able to answer your questions in an informal fashion. Also, Trade Unions have often negotiated the pension benefits can be helpful. Some companies allow direct access by their employees their pensions advisors. Some companies may include pension information in their new employee induction pack. A small number of companies may have pension information on their company Intranet.
What happens when I retire?
First of all, you will be entitled to a tax-free lump sum. The maximum lump sum at normal retirement age is 1.5 times your final salary if you have had 20 years service. (exception:If you are a 5% proprietary diector, you can have 25% of the fund instead)If you retire early or have less than 20 years service, you will be entitled to a lower lump sum.
The balance must be used to buy an annuity. An annuity is provided by a pension company. You give them the pension fund and they give you a monthly pension for the rest of your life. If you die early, the life company gains. If you live for a long time, the life company loses out. They take the longevity risk.
If you have made Additional Voluntary Contributions, you may move them into an Approved Retirement Fund (ARF) or Approved Minimum Retirement Fund.
Some interesting posts