Pensions: The most important step is simply getting started

The My Future Fund scheme may well have expanded pensions coverage to include most people in employment, but it does not cover the almost 360,000 self-employed individuals in the State. What are the options for those people?

In Ireland, self-employed individuals are not eligible for My Future Fund and cannot opt into it, says Cathal O’Toole, director of financial planning at Irish Life Advice Solutions. “Self-employed individuals with enough PRSI contributions are entitled to the State pension, just like PAYE employees; however, in order to maintain a certain standard of living and to save for retirement, they may independently set up a private retirement savings account.

“When it comes to retirement funding, self-employed people have two options. The first is a personal pension − or a retirement annuity contract (RAC), to give it its official title. Essentially, this is a pension contract between an individual and a life [assurance] company. As of January 1st, 2024, Revenue no longer approves new RAC applications from life assurance companies. However, existing RACs can continue to be issued.”

The second option is a personal retirement savings account, known as a PRSA, says O’Toole. “Like a personal pension, a PRSA is essentially a flexible, long-term personal pension investment account.”

For many self-employed individuals, a PRSA or personal pension (RAC) is often a straightforward and flexible way to begin saving for retirement, says Sinead McEvoy, head of retirement solutions with Standard Life. “Contributions can generally be increased, reduced or paused as circumstances change, making them particularly suitable for people whose income fluctuates.”

For someone starting retirement planning today, a PRSA will often be an attractive option due to its flexibility and portability, says McEvoy. “It can also serve as a ‘whole of life’ retirement solution, allowing the same arrangement to be used both while building retirement savings and later when accessing retirement benefits. The most suitable option will depend on an individual’s income, retirement objectives and personal circumstances. Professional financial advice can help determine the most appropriate solution.”

The most important step is simply getting started, McEvoy says. “There’s rarely a perfect time to begin saving. The earlier someone starts, the longer their money has to benefit from investment growth and the effects of compounding.”

For those in their 40s and 50s with no pension, McEvoy says the first thing to remember is that it is never too late to improve your retirement prospects. “In fact, people in their 40s and 50s may have more capacity to make an impact than they realise.

“Many people do not reach their highest-earning years until later in life and Revenue allows higher levels of tax-relievable pension contributions as people get older. Someone in their 50s may therefore have greater scope to accelerate retirement savings.”

The key is to take action, she says. “A useful starting point is to make retirement feel a little less abstract. Think about the life you’re living now and the life you want to live in retirement. What might change in your day to day, and what might stay the same? From there, you can start to understand the level of income you might need to support it. Understanding how to make the most of available tax reliefs and putting a realistic plan in place can all make a meaningful difference.”

Another factor to consider is the nature of the underlying fund in which people in that life stage choose to invest, adds O’Toole. “This investment approach will differ for everyone and should reflect their risk appetite, the number of years until retirement, and their needs and objectives.

“In Ireland, the number of people aged 65-plus is expected to double by 2057. This ‘longevity megatrend’ will reshape how people live, work, prioritise, plan and retire.”

There are three main tax incentives designed to encourage individuals to save for retirement, says O’Toole. “Self-employed people can reduce their income-tax liability by investing in a pension.

“Contribution limits increase with age: under 30 (15 per cent); 30–39 (20 per cent); 40–49 (25 per cent); 50–54 (30 per cent); 55–59 (35 per cent); and 60 and over (40 per cent). These percentages apply to earnings of up to €115,000 annually.

“Once contributions are made to a pension, the funds grow tax-free. In addition, when they retire, individuals can usually take a tax-free lump sum.”

Flexibility is often important for self-employed people because income can vary significantly from year to year, says McEvoy. “Rather than focusing on a fixed monthly amount, some may find it more practical to review contributions annually and save more during stronger years when cash flow allows. Contributions can then be adjusted if trading conditions become more challenging.

“The key is to develop a consistent long-term savings habit rather than focusing on short-term fluctuations in income.”

Self-employed individuals do not have an employer contributing to their pension alongside their own savings. Therefore, it is important that they take action to close the coverage gap, says O’Toole.

“Several mindset barriers can prevent people from starting a pension. These include procrastination, loss aversion and present bias, where immediate costs and priorities feel more urgent than a benefit many years away. Many people may also find pensions confusing. A good financial adviser can help make pension saving simple and, with the generous tax relief available, their accountant will thank them.”