Protecting Your Legacy

Saving enough of your hard-earned money into your pension to prepare for retirement is a good idea. But how do you protect what you have saved and make sure it goes to your family

 The advantages of having a retirement fund include tax relief on your contributions, tax-free growth on its investment and you can take a tax-free lump sum at retirement of up to €200,000. However, if you were to pass away what you leave behind as a legacy financially, including your pension, will more than likely be subject to tax.

Your Total Retirement Fund

Think of your total retirement fund as a pot. If you leave your pot to your child it will potentially be subject to inheritance tax or income tax. By using a small proportion of the value of your pot on an annual basis you can set up and pay into a life insurance policy, which will cover the tax bill that will inevitably be due. In this case, 100% of your child’s inheritance from your retirement fund can be protected.

You may or may not be familiar with what is known as a Section 72 life insurance policy which is used to help offset an inheritance tax liability. It is a special insurance policy taken out specifically to help pay taxes arising from inheritance. If setup correctly, the money paid out, when it is used to pay these taxes, will not be subject to tax.

You may leave your Approved Retirement Fund to your husband or wife to make use of when you pass away. It won’t be subject to inheritance tax but any money they take out of it will be liable to income tax.

• If they decide to cash in the entire fund it will be subject to PAYE at marginal rate

(plus PRSI and USC).

• If they don’t take any money out, the fund will still be subject to tax. From the year they turn age 61 ‘Imputed Distribution Rules’ will apply which means income tax is payable on an annual minimum withdrawal amount drawn down from the fund.

And when your spouse passes away the retirement fund may then be left to your children. Alternatively, you could consider leaving your retirement fund to your children.

Retire Inspired

The phrase ‘Retirement Planning’ is almost universally understood to relate to financial planning. But increasingly it is seen that there is more to retirement that just viewing this issue through a financial lens, i.e. planning for retirement.

As a financial adviser, I perhaps naturally focus on the figures – estimated pre-retirement earnings, fund projections, investment growth rates etc. But what sometimes is overlooked is getting the client to also envision what retirement will actually look like.

What do they plan to do in retirement, how they spend all the extra spare time, do they plan to do more travelling, what new interests/hobbies might they take up, will they engage in new learning etc?

When today’s retirees started working, perhaps in the early 1970s, the average life expectancy for retiring at age 65 was some 12 years for males and about 15 for females. Today the average is some 20 years and circa 24 years for females. Not alone can today’s retirees look forward to a much longer retirement, but in most cases, they are far healthier than in previous generations.

It is important that as people approach retirement, they have a good grasp of how their finances will be positioned so that they may look beyond the day of retirement. Some helpful questions to perhaps ask in the planning stage are;

  • What do you plan to do in retirement, how will you spend your time?

  • What are your major expenditures?

  • What new or increased expenditures might arise in retirement, e.g. more travelling?

  • Do you regularly shop around for better deals on items such as utilities?

  • Will you perhaps downsize after retirement?

Recently I have been contacted by several people who have received their leaving-service and retirement options directly from the Pension company. They were originally going to choose the option they thought suited them. But upon meeting with me and going through the above questions, they felt more confident that they made the right choice for them and in some cases they made different decisions than initially planned.

One client was entitled to a substantial tax-free cash amount which she nearly missed out on as she did not fully understand the options. Another client who initially thought they were required to wait until age 65 to drawdown their pension benefits, was able to access their pension options.

The better you can envision retirement, the better you will be able to decide on financial planning options (e.g. what tax-free lump sum, whether Annuity or ARF, investment profile/risk rating of investment options etc).

In your 30’s? Here’s some financial advice!

Living through your 30’s can be a challenging time financially. It’s often the time when “big moves” happen in life: marriage, having kids, buying a home, career development etc. It’s a time to be enjoyed, and it’s also a time to be careful financially! You don’t want to spend your 40’s and 50’s trying to make up for a lost decade… Here are a few ideas to help you avoid that very situation happening.

Live off your income only
Living an appropriate lifestyle is crucial to financial stability. Once you start living beyond your means, credit card bills start racking up and you’re on a downward spiral. And when this spiral starts, it’s very hard to break out of it. The solution is to match your lifestyle to your income. If that means less nights out or luxury purchases, well that’s the way it has to be!

Don’t blow your bonuses!
While not suggesting for one minute that you should live a miserable existence with no luxuries whatsoever in your 30’s, bonuses are not an opportunity to just fritter away cash! Yes you and your family deserve treats, and bonuses might play a role in these.  However getting a bonus is also an opportunity to put a few euros away for a rainy day, whether that’s a war chest from which you’ll educate your children or indeed providing a boost to your retirement planning. Money saved now will make a huge difference in the future, as the impact of time and compound interest will turbo-charge your retirement fund.

Know your spending
Financial Brokers observe that one of the main challenges faced by clients in their 30’s is actually knowing where their money is going. Having a family budget is a critical element of personal financial planning.  To do this effectively, you need to actually track every cent spent over a period of one to two months. You’ll be amazed where money is being spent that you’re hardly even aware of. Is there an alternative to buying all those coffees every day? Can you cut down on taxi journeys and use public transport? Could your family shopping methods change, to feed the family in a more cost effective (and possibly healthier) way?

Focus on your career
Your 30’s are the time when significant career moves can happen. Are there opportunities for you to bring your career to the next level by undertaking further study or indeed by putting your hand up for more work? After all, your career is the driver of your income and increasing your income makes a lot of these challenges much easier to face. 

Debt is the enemy of savings
Of course you need a mortgage if you want to buy a house. But make sure you can afford your repayments. And keep that credit card in check! Servicing debt is a killer when trying to save money so beware of taking on debt that you cannot afford.

Above all, enjoy your 30’s! They are halcyon years, a time of great fun and opportunity. Live your life and set yourself up well for your later years too.

Looking for Savings Tips? Think broader than Deposit Accounts…

As the economy continues to recover and many consumers are again starting to have a few bob left over at the end of the month, the question for them now is what to do with this extra money. In the past, this money was diverted into a deposit account to keep it separate from the day-to-day spending within your current account. But with interest rates now hovering around 0%, this really is a questionable approach. One of the questions that Financial Brokers are most frequently asked today is, “What is the best savings plan for my money?”

The answer to this needs careful consideration if proper savings advice is to be given. What are you trying to achieve with your savings – are you saving for a rainy day or have you a specific goal in mind, maybe to fund education in future years or to buy a new car? What are your time horizons or do you have any? What is your appetite for risk?

A deposit account is a suitable vehicle if you are putting money away in the very short term. It is accessible and secure (at least up to €100,000). But if your target is to save for a number of years, deposit accounts come with a price. As long as price inflation exceeds the interest rate payable (which remember is pretty much 0%), the value of your money is falling all the time. You won’t be able to afford in the future the things that you can just about afford today. Therefore the first of our savings tips is to consider your timeframe very carefully!

Our second savings tip is to consider your appetite for risk. If you are not satisfied with your money effectively losing value every day as it sits on deposit, a Financial Broker will help you identify your own tolerance for risk, and will then help you identify how much risk is appropriate for you within a savings plan. Once you know the appropriate level of risk, they will then find the best savings plan to meet your specific needs. This might in fact be a deposit account, or instead it may be a savings policy with a life assurance company. The one thing you can be sure of though is that you are getting the right savings advice to meet your specific needs.

Ultimately, understanding what you are trying to achieve with your money sits at the heart of this. Once you are clear on the end goal for your money, your timeframe and your appetite for risk, you can now start planning with confidence. This brings us to our final savings tip! Talk to your Financial Broker and get their help in planning your savings approach. This is definitely a better way forward than blindly placing your money on deposit and watching the value of it erode away over time.

What would you do to save €2000 a year ?

The Central Bank of Ireland recently announced that there are over 100,000 households with mortgages, who could get a better deal by simply switching their mortgage. What most banks rely on is that people will not want to have to go through the hassle of switching, but have you really considered enquiring about reducing your monthly mortgage cost?

Example:

If we use a mortgage of €240,000 on a house worth €300,000 (80% Loan to Value) and a variable rate of 4.5%, the rough cost of interest payments per year is €10,800. Currently, one Mortgage provider offers 3 year fixed rate of 3.6% for mortgages that would yield an annual saving of €2,160. That’s €180 a month less in interest repayments just by moving mortgage providers!

Is there a lot of work involved?

The first step is to put in an enquiry to see if it’s worth your while. This is not a lot of work and shouldn’t take long. If you decide the savings are worthwhile, you would then have to consider if you wanted to proceed with an application.

In this regard, the real question you should ask is “am I prepared to put in a little work getting documents together to make monthly savings on our mortgage?”. Your mortgage provider is hoping that you are prepared to pay more to avoid the hassle involved in switching to a cheaper provider.

Isn’t there a huge cost involved?

There are costs involved but the main costs are usually the legal ones. Some mortgage providers now cover up to €2,000 of potential legal costs. This would make the process far less costly. But even if you had to cover the entire legal fees, if you were saving over €2,000 a year, it would still be a cost saving exercise.

Can I make any other savings?

There is a good chance that many people took mortgages out directly with the banks and were required to take out Life Assurance (e.g. Mortgage protection). In many cases, this was not the cheapest cover available. By reviewing your mortgage you can also review your Life Cover.

How do I know if it’s worth my while?

If you have a mortgage that is currently 90% below the value of your property (90% LTV), you may be able to make substantial annual savings. The lower the Loan to Value (LTV), the better the rate/savings you will be offered.

I am interested, what do I do?

If you contact me by phone/email, I can begin a pre-enquiry. This shouldn’t take long and all you are doing is seeing if it’s worth your while. You are not obliged to proceed and will not incur any cost at this stage. Asides from a few minutes of your time, what do you have to lose?

What happened to my Pension savings when I moved Jobs?

If you or your partner were contributing to a Pension arrangement in a job that you have since left, then you may have Pension savings sitting paid up in your former Employer’s Pension scheme. Indeed the same may be the case if your employer was contributing to a Pension Plan on your behalf while you were working in that company.

When people change employment, many people do not think about personally taking control or moving the Pension fund that they had built up during the years working in this company. You are entitled to what is called “leaving service options” when you leave employment. These are a list of options of what you can do with your Pension Fund now that you are leaving.

In many cases one of the options is that you do not have to move the Pension savings and they can remain in this company Pension plan until you are at retirement age, at which stage you can drawdown your entitlements. But it is worth considering another option that you may be entitled to take. This option allows you to move your Pension savings from the company Pension plan to a Pension arrangement in your own name.

The main benefit to moving from a Company Pension arrangement into a Pension arrangement in your own name would be:

  • All Correspondence is sent directly to you as opposed to the trustee whom in many cases is your previous employer

  • You are in complete control over your Pension and do not require signoff from a third party (trustee) when you wish to move it or draw down your entitlements

  • It can be easier and quicker to get information on your Pension(s) which also makes it easier to keep tabs on exactly how many Pensions you have and where they are.

Some people like to put all their Pensions into one Pension plan. While it has its advantages, it is worth noting that in some cases it can be beneficial to keep some Pension plans separate. A big reason would be if at retirement, you have only one big Pension plan, you must take your full retirement options. If you have several Pension arrangements you can draw your retirement options down at different times if it is more convenient.