General Facts - Irish Pensions

If you are new to the financial mine-field that is pensions, then this article will be an excellent place to start. Giving a brief and general overview of Irish pensions, you should be able to gather some useful information from reading on...

So, what is meant, in general terms, by the word pension? Basically, a pension is a financial arrangement that allows individuals to receive an income during retirement, when they are no longer working in regular employment. A pension is usually contributed to during a person’s employment using their salary, although certain individuals may be able to finance a pension via an alternative route than employment.

A pension is generally the best means of saving for your retirement because there are excellent tax-relief benefits, although there are capped limits on the amount per annum that is subject to tax-relief. The capital accumulated during the course of the pension policy is later used to fund retirement.

Pension plans come in various forms and can be provided for by employers, insurance companies, the government, or certain other organisations, such as trade unions or employer associations. Sometimes pensions are referred to as retirement plans or superannuation, although these are usually occupational pensions, rather than personal pensions. In the USA pensions are usually referred to as retirement plans, although in Ireland and the UK they are more commonly known as pension schemes.

An occupational or employer pension is a pension that is set up by an employer for the benefit of their employee. Governments, unions and other institutions also often make provisions for pension funding. An occupational pension may appear at first sight to be an extremely generous offer by employers, but they too benefit from such schemes for tax purposes. A large proportion of pensions also offer certain insurance features, for example, they may pay out to a person’s dependents in the event of death.

People commonly use the term pension to refer to the payments that are given to a person once they have reached the age of retirement. The age a person retires is usually determined by the state legally prescribed age, or an age stipulated in an employment contract. The person who receives the payments from a pension plan upon retirement is called a pensioner or a retiree.

Many countries within the developing world, including Ireland, have set in place state pensions in order to fund the retirement of their citizens and residents, in the aim of providing them with a reliable income upon retirement. In the majority of cases, and certainly true of the Irish pension, there are specific requirements that people must meet in order to be able to draw the state pension on their retirement. This usually requires a regular payment throughout the duration of the individual’s working life and is taken on a ‘contributory basis’ out of a person’s gross pay in the form of PRSI contributions, the amount of which a person qualifies for depends on them meeting the predetermined requirements.

Today, with the longer life-expectancy and an aging population that has thus far been unknown to the developed world, and largely caused by the baby-boom during the post WWII era, coupled with the trend towards a decrease in birth-rates, we have a situation that is fast approaching the tipping of the scales in a negative direction. In other words, because of the lower number of people remaining in employment, and providing for the older generation through their PRSI contributions, this means that there will likely be a deficit in the government’s pension fund. Older people may not see a state pension in future, or taxes for the working minority may increase.

However, it is not all bad news: people still have the option, and one that is highly recommended by any person working in the financial sector, of starting a personal pension scheme. By starting a personal pension scheme a person can ensure that they can provide themselves with a secure financial retirement, without having to be too concerned about the possible collapse of the state-funded pension.