Figuring out how to start a pension can sometimes be the most difficult aspect. Yet, the more time you spend pondering the more compound interest you say goodbye to.
The blog aims to outline and simplify the steps you may encounter. The steps may vary but they should help you understand the process of starting a pension.
Alternatively, you have done the research and are ready to start the process.
Step 1) Understanding How Pensions Work
As with anything, understanding the fundamentals are key. Particularly when it comes to pensions. A non-jargon approach is our way of doing things. The fewer acronyms the better.
Any advisor worth their salt will explain the process in simple terms. There are many benefits to starting a pension.
Step 2) Check if your current employer offers a pension scheme
Before diving in and assessing your options, your employer may offer the ability to join a pension scheme. Many employers run Defined Contribution (DC) pension schemes.
If so, contact your HR department and discuss joining the scheme.
Step 3) Assessing different types of pensions
Depending on your employment status, you may have different options available.
As a PAYE employee you may have the option of joining your employer’s occupational pension scheme. Alternatively, if no such scheme exists, your employer must provide the ability for you to join a PRSA through the payroll system.
Step 4) Meeting with an advisor
Now we understand how a pension scheme works and roughly what options are available, it is time to consult an expert.
What would usually be face-to-face over a cup of coffee will most likely now take place over Zoom or Microsoft Teams. Although this is becoming more the norm and you can still ask all the questions you would like.
However, it is important to find the right advisor for you. Someone who you can trust and keep your long-term future front of mind. Your advisor should take a holistic view of your situation as your pension is only one piece of the puzzle.
Step 5) Fact-Finding Process
Fact-finding is an essential part of the process. It is by no means exciting but important nonetheless.
Your advisor should take time to carry out an in-depth fact-find and gather the relevant information. This will help shape any recommendations they have further down the road.
Step 6) Risk Assessment
Pensions can be a little confusing. There are quite a few moving parts. This is due to the options available to you. For example, you will have the option of investing your pension fund into different asset classes such as:
This will be low risk and give you greater control but runs the risk of inflation eating into your investment
These are shares in companies, bought and sold on the stock market.
Often these will be commercial property such as office buildings or industrial premises.
These will be either Corporate Bonds & Treasury Bonds (Government).
The risk level will vary. A multiple-choice risk profile questionnaire will help determine your appetite for risk.
On completion, you will be assigned a number between 1 and 7. These numbers correlate to a European Union Risk Rating. However, it is worth noting that the approach is not fully standardized. Different companies may take different factors into account when gauging risk.
Even with these questionnaires, risk can still be somewhat subjective. Discuss your situation with your financial advisor in-depth.
Step 7) Selecting an Investment Strategy
The results from your fact-find and risk assessment will have an influence on your investment strategy.
Depending on personal preference, you may want to be heavily involved and know each intricate detail. On the other hand, you may want to leave it in the hands of your trusted advisor.
Either way, you will most likely have the following options available.
This is where the fund manager aims to beat the market with their market research and expertise.
By contrast, a passively managed fund will follow the market index. This is the most popular option for those starting a pension and who want a wide range of fund options to mitigate risk.
An option for those comfortable in making their own investment decisions.
Step 8) Starting A Pension - Documents needed
The pensions industry requires several pieces of documentation due to regulations.
However, there is a standardized process of information gathering when applying to start a pension. You will need the following:
- A drivers license or passport for proof of identification
- A utility bill within the last 3 months as proof of address
- A payslip dated within the last 3 months or social services card for proof of PPS
- BIC & IBAN payment details of the individual or sponsoring company
- The current value of any pre-existing pension benefits
- Confirmation of investment choice and start date
- Signatures on all application forms, statement of suitability, and compliance documents.
Company directors and those who are self-employed will need additional documentation. This may include:
- The start date of employment with that company
- Shareholding within the company (if applicable)
- Company registration details
- Letter of exchange
- Assignment of scheme trustees. Trustees will be in charge of all legal and reporting requirements.
Step 9) Annual Review
So, now that you have started your pension it is just the beginning. We would recommend against forgetting about it. You will receive an Annual Benefit Statement outlining your fund’s performance.
However, these statements are often full of jargon and difficult to understand. It will be impossible to plan for retirement if you have no idea of your pension fund projections.
Fees and charges will also have an impact on your fund. Although these are part of every pension scheme, their rates will differ. You may also come across acronyms such as:
Understanding these is vital. Enlist the help of your financial advisor to discuss each and how it will impact your pension long-term.
Keeping a close eye on your pension will make it much easier to plan for retirement.
Take a couple of minutes each year to sit down with your advisor in person or over zoom. Discuss the performance of your pension and any potential shortfalls that may arise.
If you would like to see the impact of fees and charges over time we have put together a case study.
Benefits of starting a pension
Some of the benefits associated with starting a pension are:
- Tax relief – If you are in the lower tax bracket, for every €100 you contribute, it will only cost you €80. If you are a higher rate taxpayer, you will receive even more back. A €100 contribution will only cost you €60.
- Tax-free growth – A huge benefit with a pension is that any money currently invested will grow free of tax.
- Tax-free cash – When you retire, current legislation allows you to access 25% of your fund tax-free (up to a lifetime limit of €200,000).
These are just some of the benefits that a pension can provide. It will also assist you in living the lifestyle you would like in retirement.
We are living longer, healthier lives and it is never too late to start.
Who can you set up a pension with?
There are several large life companies across Ireland that offer various pension products. We work alongside experienced financial advisors who have agencies with all the major life companies.
Using a financial broker will allow you to consult an expert who can shop around and ensure you get the best bang for your buck.
What are the next steps?
We hope we have provided clarity on how to start a pension. There are various steps involved but having the right advisor is crucial.
Someone who can explain all options available. Certain options will have both benefits and drawbacks. Starting a pension will give you the opportunity to take advantage of several benefits as well as helping to provide for your future.
If you would like to chat with us about your options we would be happy to help.
We are available to chat on 01-890 3518 or feel free to contact us via email at firstname.lastname@example.org.
Looking forward to it!
Start your pension today
*This blog should be used for information only and not taken as financial advice.