Is It Pension Season For Everyone?

Traditional retirement planning isn’t the correct fit for everyone. There are broadly three cohorts of people, each requiring a different approach to planning for their future.

• Those on lower salaries should always prioritise buying a house over saving in a pension, read more here.
• Individuals with very high salaries will likely hit the €2m pension cap, especially if bonuses are paid to the pension. Creating inter-generational wealth should be considered, by establishing a family partnership or restructuring their own company with growth shares, read more here.
• Mid to high earning individuals should pay into a pension and use extra cash/bonuses to make additional voluntary contributions (AVCs), rather than accumulating excess cash in the bank. Keep reading!

Employer Pension Plans

Ideally, retirement planning, should be in the form of matched employer contributions. This is important to consider when looking for a new role and could be the deal breaker if you’re choosing between two different job offers.

We need to mention that employment contracts should state that potential bonuses can be paid directly to the pension, to maximise tax benefits.

In other words when looking for a job two things are really important:

1) employer sponsored benefits like income protection and a matched pension contribution

2) the option to pay some or all of a discretionary bonus directly to the pension

AVCs

Additional voluntary contributions (AVCs) are any contributions over the regular set monthly amounts paid into an occupational pension by an employer and employee. Beyond a small emergency fund cash should be used to overpay debt or fund AVCs.

AVCs make sense for those accumulating post tax savings in cash, as they can save you tax and increase your retirement benefits. AVCs can be made for 2021 up until 31st October 2022. You can put in a claim to receive tax back straight away. If you’re self employed you can make a pension contribution to reduce down your tax bill. This is why the month of October is often referred to as ‘Pension Season’. Read more about tax relief for pension contributions here.

A Note on Investing

On balance, Restricted Stock Units (RSUs) should also be sold to pay down debt. Keeping stock in your employer is a high-risk strategy and not a replacement for retirement planning.

When investing your pensions funds, open the taps full equity. Low risk multi asset strategies don’t make sense when saving regularly over many decades.

We should also mention the merits of cashing in ‘old pensions’ as soon as possible (age 50) and using tax free cash to pay off debt, rather than leaving the pension invested in a lifestyle strategy which de-risks to lower return cash and bonds read more here.

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