What you need to know about topping up your pension

Considering a pension top up? The benefits and long-term rewards of a top-up are more than you realise. This article was first published on Independent.ie.

Having a pension is all about providing enough money to live off for your retirement years. But what happens if you don’t provide enough, and you now realise your pension contributions won’t deliver the lifestyle you want at retirement?

According to iReach Insights on behalf of Zurich, which examined the attitudes of adults towards paying into a pension, it found that while 34pc of those working have a company pension, 37pc of workers have no pension*.

The iReach research, carried out in August 2023, also found that 65pc of all workers are concerned about having enough money for retirement, with 37pc being very or extremely concerned. There is an even bigger concern in today’s world as the research found that €28,257 annually is the average amount expected to lead a normal life after retirement.

Kristen Foran, National Sales Director at Zurich, says, "We're living longer, and retirement will be costly for everyone. An annual income of approximately €13,000 from the State Pension may not suffice, especially in cities like Dublin where the cost of living is very high.”

The subject of pensions may seem far-removed for some, especially when they are in their 20s or 30s. But preparing for that future through proper pension management is a must.

The need to top up

According to Kristen Foran, who has 25 years’ experience at Zurich, a leading pensions, insurance and financial planning group, while many people start private pensions, they often keep their contributions static. So, the need to ‘top up’ a pension becomes critical.

Topping up essentially means increasing your pension contributions to match your retirement goals better.

"We use this time of the year to talk to people about starting pensions, but also topping up their pensions,” says Kristen. “You have to revisit your pension on a yearly basis to see if it will hold up your lifestyle when you retire.”

Starting a pension as early as possible gives more time for your fund to build up and you also benefit from the compounding of investment returns. Even just a few years can make a difference. For example, starting a pension at 30 instead of 35 could lead to a retirement fund that is over 20pc higher.

But what is a typical, satisfactory retirement income? In general, we will need around two-thirds of our current pre-retirement income to retire comfortably. However, this may not be enough for everyone and is completely dependent on the lifestyle you want when you retire.

For some, retirement comes with lower living expenses as they've already paid off their mortgage and no longer have dependent children at home.

However, for others who joined the property market later in life, a higher average pension income may be necessary to manage ongoing payments. So, they will likely need more in their pension pot, which means making higher pension contributions.

Tax advantages

One of the major advantages of pension contributions is their tax efficiency. In contrast to a standard savings account, contributions to a pension plan qualify for tax relief. This means that each eligible contribution you make will come with a tax benefit.

The amount of tax relief you receive is tied to your income tax bracket, specifically applying at your marginal tax rate.

"You get tax relief,” says Kristen. “So, if you're paying 40pc tax, and you put €100 into a pension, you get €40 back from the taxman. Pensions also offer the benefit of tax-free growth on the invested funds and the ability to draw a substantial part tax-free upon retirement.”

And while starting a pension early is preferable, it's never too late to start or top up your pension. In fact, the older you get, the more you can put in, as there are tax benefits for older people.

For example, someone aged 34 could put 20pc of their annual income into their pension and save tax. But if aged over 50, the limit rises to 30pc. It rises again to 40pc if over 60.

There’s also a commonly overlooked advantage. Kristen explains, “You can backdate your contributions to claim tax relief for the previous year. This feature becomes especially valuable as people approach the tax deadline.”

And with the due date for the filing of the 2022 Form 11 and the payment of taxes being Wednesday, 15th November 2023, knowing what tax relief you can claim is vital.

Review and reconsider providers

A yearly review of your pension strategy is necessary to ensure it aligns with your evolving financial goals. This way, you can see if you need to top up and even if it might be beneficial to switch providers to get better deals or performance out of your pension.

Kristen says, "There's no reason to stick with something if you're not happy with it; you can certainly move around. There are lots of options out there.”

Zurich offers a range of pension products tailored to various needs. One popular product is the PRSA (Personal Retirement Savings Account). It’s straightforward, has minimal charges, and provides a full range of options for investment.

If you have a PRSA or a personal pension, you can increase the level of contributions you are making or take out a new arrangement.

But before you switch or top up your pension, Kristen says first seek some advice, "We advocate talking to a financial advisor to help you make your decision. You could also come to Zurich directly, and we can assist you.

“There are rules about what you can and can't put into pensions, set out by Revenue or the Pensions Authority. So, talking with an advisor will help you know what the best thing is for you as a person, how much you should put in, and how you should invest that money.”

Zurich's online client centre allows customers to track their pension performance 24/7. There is also a list of their financial advisors here.

The financial landscape is constantly changing, and keeping on top of these changes is crucial. The ultimate goal is to ensure that you can live the life you aspire to during retirement.

As Kristen says, “A well-planned financial future is a secure one.”

Taking a small action today and speaking to Zurich or a financial broker could have a great impact on your future. With a wide range of options, control and flexibility, you can choose a pension plan that’s right for you. If you’re wondering where to start, you can find a local financial advisor near you with the Zurich Advisor Finder.

*Source: iReach pension survey, August 2023

The information contained herein is based on Zurich Life’s understanding of current Revenue practice as of 1st September 2023 and may change in the future.

This publication has been prepared for general guidance on matters of interest only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice.

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