In January of this year in one of my blogs, for a bit of fun and a bit of a challenge I designated 2015 as the year of the retirement plan. The reason for this was to try to encourage young people, and indeed other financial advisors to try to get their friends and customers to start saving into a retirement plan so that more people in Ireland would have some degree of financial independence later on in their lives.
The reason was simple. Over 50% of those working in Ireland didn’t have a retirement plan in place.
Josephine who works alongside us at City Life has a very simple way of explaining complicated retirement planning to people. She says that a retirement plan is simply a long term savings plan with tax relief.
I am pleased to report considerable progress during the year and to confirm that many young people who never had a plan in place, have started to pay some money each month into their long term savings plans with tax relief! I know they are pleased that they finally taken responsibly for their retirement planning.
The tax relief is substantial and when I am discussing retirement planning with someone and when I note there is a little reluctance to commit to a monthly payment I sometimes suggest to them that by not starting now they will pay more tax than they need to. This is always an attention grabber as Irish people hate paying taxes.
I say use it or lose it. Avail of the tax relief or pay that money instead to the tax man!
It is very easy to pay high personal taxes in Ireland. If you have taxable income of €33,800 or more in any tax year then tax can be paid at 40%.
Let’s say you are aged 45 with 20 years to go to normal retirement age and that you pay some tax at the high rate. The personal tax rules allow you to put in 25% of your taxable income and claim tax relief on that amount. So if you have taxable income of €50,000 you can invest €12,500 pa or just over €1,000 per month into your long term savings plan with tax relief which will give you tax relief that year of €4,800.
If you don’t use it you will lose the tax relief of €4,800 so you will pay extra tax of €4,800 that year and every year for 20 years which comes to unnecessary tax payments totalling €96,000 to retirement age, if you never start a plan.
By availing of the tax relief the other wonderful thing about doing the retirement plan is that should the monthly investment of €1,000 grow by even 4% pa over the 20 years it will be worth €366,000 by the time you get to age 65. A nice little retirement nest egg!
Over a 20 year period and because the fund is growing tax free a return of 4% pa or more could well be achievable. Naturally to get this type of return the value of the fund will fluctuate and will rise and fall with investment markets. It is not possible to guarantee this type of return.
So here we are at the beginning of November. 2015 has only a couple of months to go. Let’s encourage as many as we can to do something positive now so that when they get to the stage of being unable to work or simply wanting to take things a little easier that they will have the financial freedom to do so.
Ted Dwyer Family Business