Most of us will live long enough to retire. At that time, we will need an income to sustain us in our twilight years.
Anyone who earns more than the minimum wage will suffer a severe drop in income at retirement, if they only have the State pension to rely on.
Many people, therefore, need to put aside cash during their working life in order to bridge that retirement income gap.
They could save, using their after tax money, to purchase shares, property or cash and build up a retirement fund to be accessed later in life.
The issue here is that your savings will be liable to tax such as DIRT, Capital Gains Tax and Income Tax on gains or profits made. In addition, you would have to make all the investment decisions yourself; you may need to maintain your investment property and you will have to make annual tax returns, which many people find difficult and costly.
The State recognised this problem and through Legislation, set up Approved Exempt Trusts, specifically designed for people who wish to save for the express purpose of providing funds at retirement – we know them today as Pension plans.
There are many types of pension plan available, such as PRSA; Personal Pension; Employer sponsored Pension Scheme, but all have the following elements in common:
- The money paid into a Pension is exempt from Income Tax.
- The profits made on any investment gains are exempt from Tax
Because the tax treatment of pension plans is so generous, the Revenue Commissioners, worried about the potential for tax avoidance, introduced strict rules about how pensions must operate; the maximum amount that can be contributed and the maximum amount that can be taken in benefits.
They also have strict solvency rules for pension providers.
It follows therefore, that a pension plan is the most efficient method of providing income in retirement. The tax breaks and the ability to farm out the management of the investments make it easier for most people to plan for their retirement.