Why €400k is an Optimal Private Pension Fund for a Married Couple in Ireland
A question I am often asked about financial advice for couples is what sum we should target in our pension funds at our expected retirement at 65 years age. When I reply that an optimal joint Pension fund is €400,000, I am often met with an incredulous stare.
Three decades ago when the Defined Benefit pension was the regular pension arrangement, many people had built in contracts from their employer to retire on about 66% of their final salary and individuals had a level of certainty with their employers pension provision and endeavoured to build some cash savings in addition to their pension entitlement, now the retirement landscape has changed with the focus on building private pension funds to supplement any State Pension entitlement.
Tax Effective Pension Plan
I would argue that it’s not just a question of how much pre-tax Income one needs to replace in retirement, the focus should be on building a tax effective pension plan which involves planning to reduce your taxable Income to a minimum in retirement. Under Revenue rules a married couple in Ireland (over age 65 yrs.) have an annual Income tax exemption of €36,000 jointly and will pay 0% tax rate, while for Income earned over €36,000, they will pay the marginal rate of tax.
So, this target annual Income of €36,000 is reached with of 2 of the 3 Pillars of Retirement Savings,
Pillar 1 = If both married partners have worked and contributed to their PRSI for approaching up to 40 years, then they are entitled to the full rate of State Contributory Pension being €248 pw x 52 weeks, €12,896 x 2 = € 25,792
Pillar 2= A married couple with combined private pensions of €400k at retirement, would initially look to take the maximum 25% tax free lump sum, being €100,000. With the remaining €300k they could reinvest this sum in an ARF (Approved Retirement Fund) and must draw a 4% minimum distribution each year = €12,000
Pillar 3 = Other Income, Rentals, Savings, and Income from part-time work
So, our married working couple on retiring at age 65 years with their Private Pension Savings of €400k can expect to earn retirement Income of c.€38k p.a. and pay 0% tax on €36k of this Income.
You can find out about eligibility for a State Contributory Pension at Citizens Information.
How much is sufficient?
In our earlier example, we assume that the married retired couple own their house outright, have little or no significant debt and are ‘empty nesters’. So, to fund their retirement each month they have c. €3,000 to live on, to pay for food, utilities, run a car, entertainment, clothes, and a few holidays each year, it may not amount to a lavish lifestyle but remember our couple also have c. €100k from the tax-free cash which they can use to supplement their Income over their retirement. Other avenues which are available to add increased liquidity include a downsizing from their family home or agreeing to an Equity Release Mortgage (*Lifetime loan) * A contract to sell a % of one’s Residence to a Lender for a cash drawdown amount, the proceeds of which are repaid when the last borrower passes.
You have bigger plans for your retirement?
That’s fair enough, but when considering financial advice for couples, we need to remember that our married couple have worked long and hard all their life and want to kick back and enjoy their active retirement years in full. For some, that could mean more travelling, short breaks, and holidays, they may also want to contribute to their grandchildren’s education costs.
So, there are a myriad of reasons why our married couple may think that €36k of retirement Income will not fulfil their plans, the good news is that if they sit down with their financial adviser to build their retirement target fund greater than €400k, they will be pleasantly surprised to learn that their effective rate of tax will be significantly lower than 40% the marginal tax rate, see the table below from a study carried out by ‘Burke & Gilhawley’ (11/2018) ‘Private Pensions tax Relief’.
In this example our married couple with substantial private pension Income of €60,000 p.a. in addition to their State Pension (Contributory) will pay an effective tax rate of 23.3% on their total retirement Income.
‘The tax concessions provided to the over 65’s has a material impact on lowering the tax payable on private pension Income’
Effective Tax rate on retirement income over 65 years age
Private Pension Income – in addition to State Pension contributory
Married one Income
Married two Incomes
Financial advice for couples - Summary
As we have tried to demonstrate above when it comes to financial planning for couples, with a little planning and advice from a qualified financial adviser, many married couples can look forward to a reasonable standard of living in their retirement with Private Pension savings starting at €400k+. With the attractive tax exemptions for couples 65 years of age and over the effective tax rates are substantially lower than 40% as shown above.
Get some help starting your financial plan
At Imperius Wealth we appreciate that financial planning for couples is unique and that solutions appropriate to your personal situation are required. We are committed to helping you meet those requirements.
Please contact us today and one of our highly qualified professionals will get back to you.