It is very important that each person plans for his or her financial future in retirement. The world is becoming an expensive place and people are living longer and many choose to retire before age 65, when they are still active both mentally and physically, so you see there is much to ponder in the planning for retirement. Nowadays with increased life expectancy you can be planning for anything up to 30 years post retirement!

The sooner you start planning for what will happen in the future,
the sooner you will be on your way to making it happen.

You will also need to consider the tax implications in drafting your will and ensuring that your estate can pass to the next generation as tax efficiently as possible. Failing to plan here can have very expensive consequences.

Mannion Lochrin & Co are here to help you in deciphering the many choices you will have to make along with giving you practical advice as to how to proceed. So if you want that nest egg for the children, that yacht in the bay, the overseas holidays or whatever you want when you retire then our advice is to commence planning today. It’s never early and it’s never too late.

What are the options?

So what do you need to be thinking about? Responsibility for providing an income in retirement is shared between the State, employers and individuals. Three pillars of retirement provision can be identified:-

1. State pensions provided under the social insurance and social assistance systems;
   
2. Occupational pensions provided through employer sponsored pension schemes in both the public and private sector, or personal pensions (including PRSAs) designed for the self-employed and those in non-pensionable employments;
   
3. Private savings and wealth.

A pension is still one of the most tax efficient ways to replace earnings at retirement so as to maintain one’s standard of living during retirement and to provide an adequate future income for dependants. So pensions and retirement planning go hand in hand.

State pension provision

The State pays social welfare pensions to any individual who either has paid certain classes of PRSI and satisfied certain conditions or to those who satisfy means tests. Most people will receive some form of social welfare pension from the State on retirement. There are a variety of entitlements and benefits which include the following:-

• a PRSI derived old age contributory pension;
• a PRSI derived widow’s contributory pension;
• a means tested old age non-contributory pension;
• a means tested widow’s non-contributory pension.

Current State social welfare pensions(typically form age 65 onwards) are however fairly low flat rate benefits which are not in themselves sufficient for many people to maintain a reasonable standard of living in retirement. The maximum State retirement (PRSI) pension currently payable to an individual is approximately €7,660 per annum.

Occupational/Private Pension Plans

There are a number of avenues open to an individual in providing for their own pension planning. The government has been increasingly active in recent years in encouraging people to plan for their own retirement (thereby reducing the potential future burden on the state). To this end they have created a favourable taxation regime to promote the investment by individuals into their pension funds. The principal avenues available are:
Become a member of an employer scheme
This is the most straightforward one for employees if the option exists from their employers who often make a contribution also. New regulations have also made it much easier to transfer your pension fund from employer to employer if you wish so even if you leave a company you can often retain your pension fund intact.
Form a company pension scheme for proprietary directors
One of the most tax efficient ways for proprietary directors to extract profits from the business is to operate a directors’ pension plan. Depending on circumstances a company director can extract upwards on 200% of his/her salary into their pension plan tax free.

Invest in a PRSA

PRSA’s were announced with much fanfare in the last few years as a solution to the low participation rates of Irish workers in organised pension plans. Whilst they have enjoyed limited success there are moves afoot to make them more attractive to the general public. Basically your standard PRSA (Personal Retirement Savings Account) is a generic pension product with standard fee structure which allows you to make payments into an approved pension scheme and claim tax relief without the hassle of setting up the scheme yourself. Note there are obligations for employers in relation to employee access to PRSA’s which need to considered here also.

Other pension plans

With the relaxation in the regulation surrounding the pensions area there are a myriad of other products from bespoke PRSA’s to Pension mortgages which are now available in the Irish market. They are designed to suit specific investment requirements for individual investors but are too numerous to expand on here.

Private Savings & Wealth

The goal in any retirement planning is to ensure that:

• Your retirement will be financially secure
• Your children will be adequately catered for

Personal circumstances will dictate how you prioritise each of these goals but it will be difficult to satisfy No 2 unless you look after No 1. We have already seen some of the options available in pension planning however there are other ways to ensure financial security in retirement.

Property

Property with a good rental yield has always been a popular choice in retirement planning. Unlike stock market investments which pension funds typically invest in, property is a visible, tangible asset with well understood income streams and capital value. An often overlooked asset is the family home and there are a number of options available to the homeowner to allow them to access the value in this asset without necessarily putting the home at risk.

Investments

Shares can provide an income stream in retirement through dividends whilst allowing for potential capital appreciation in the long run. Similarly bonds allow for an interest income stream with more capital security. Typically investments allow you to see a portion of your assets as required thereby giving you greater access to your wealth whereas it can be difficult with property to see a portion of the investment.

Business

If you own a business then this can often be a most valuable asset. This asset can be transferred tax efficiently and financially astutely with the proper planning. Too often not enough planning goes into the transfer of this asset to the next generation to ensure that retirement is looked after as well as the continued success on the business post succession.

Estate planning…why bother?

One area of financial planning that is often overlooked is the area of planning for one’s estate. Tax is payable on certain assets distributed after your death but with astute planning this burden can be significantly reduced and often eliminated with the appropriate planning and action.

Mistakes in this area are hard to rectify and remember you won’t be around to help!

What happens if there is no will?

Firstly let’s outline the process for someone who dies and doesn’t leave a valid will. In this case the estate is divided in accordance with the 1965 Succession Act.

• If you are married with children then your spouse gets 2/3 and your children get 1/3 equally amongst them. If there are no children then your spouse gets the entire estate and if there is no spouse the children get the entire estate. In certain circumstances children can include grand children.
• If there is no spouse or children then the estate passes to the surviving parents, and if no surviving parents then it goes to surviving siblings and if there are no surviving siblings the estate passes to nieces and nephews. This process continues until the surviving relatives are exhausted in the order stipulated by the Succession Act.

What are the tax implications of inheritance planning?

Let’s suppose you have or wish to put a valid will in place, what are the financial considerations you need to consider. The principal tax you need to be aware of is Inheritance tax which is a subset of Capital Acquisitions tax (CAT). This tax is 20% of the taxable value of the estate and is payable within 4 months of the receipt of the inheritance by the beneficiary. There are numerous cases of people having to sell the property they were left under a will simply to pay the inheritance tax so planning is essential here to try to avoid such a scenario.
The taxable value of an estate is the market value of the inheritance less the personal inheritance gains tax threshold of the beneficiary. For inheritances by a spouse these are exempt from CAT and there are also some exemptions for certain asset types such as certain farming and business assets and the principal private residence. The personal exemptions are revised annually by the revenue commissioners but the approximate allowances available to the following beneficiaries are as follows:

Relationship of recipient to Disponer CAT Threshold (2005): Child €466,725
Grandparent/Grandchild/Sibling/Niece/Nephew: €46,673
All others €22,336

So if you leave €1m to your child then he/she may have to pay approx. €107,000 in CAT (within 4 months of receiving the inheritance) as a result of this unless you take corrective action to mitigate this. In order to be able to properly plan for this situation you need to know your options and plan accordingly.

Enduring Power of Attorney

Another area to consider in the situation around Enduring Power of Attorney (EPA). This document stipulates what your wishes are for your personal care and/or your business & financial affairs if you are mentally incapacitated and not able to act for yourself.  The 1996 Powers of Attorney Act introduced the EPA which if completed in the manner set out in the legislation and then registered, operates after the person has become mentally incapable thus allowing a trusted person to continue to care for the person and avoids the inconvenience and expense of the supervision of the Courts.
The EPA covers situations where a person becomes mentally incapable, for example as a result of an accident or a stroke and can no longer be said to be able to discharge his or her own affairs. AN EPA document records the wishes of the person so that even in their incapacitated state their affairs are handled in accordance with their wishes. In the absence of an EPA then matters can become quite complicated and even involve the courts deciding what happens to a person and their affairs even though they are still alive.

What should you do?

• Decide you absolutely need a will or re-consider your existing will in light of taxation and legal issues discussed here.
• Consider putting an EPA in place.
• Identify all your assets.
• Identify what assets you wish to leave to whom.
• Is this plan likely to trigger a CAT liability for the beneficiary?
• Will they have the means to discharge this liability without a forced sale on the asset?
• Consider your options (like selling the asset before you die).
• Are you using all the CAT threshold of all your children?