Great Escape

Ever dreamed about making an early departure from the world of work? It really pays off to start planning sooner rather than later, writes Charlie Weston

Tuesday November 6th 2007
By Charlie Weston

Ever dreamed about retiring early? Maybe you fantasise about sipping wine on the terrace of your second home in France, having given up work at the age of 55.

If early retirement is your aim, then now may be the time to start planning your escape.

Fortunately, pension rules make it easy to get tax relief on pension investment.

The downside is that early retirement leaves you with less time to build up the larger sums required to make the most of an early departure from the world of work.

Early retirement inevitably shortens the period during which assets can be accumulated to fund retirement. Annuity rates are reduced and, consequently, a larger retirement fund is required to provide the same level of pension provision.

A delay of just five years in starting your pension could reduce your final retirement fund by up to one-third, according to Bank of Ireland Life.

The earlier you start funding for a pension, the quicker the effects of compound interest can be felt -- the earlier you start the easier it is to accumulate funds, according to Veronica Gray of wealth advisers, Acumen and Trust.

- Check how much you need

When assessing how much you need to save, you should establish how much you are going to want when you retire.

The Pensions Board has a calculator on its website (www.pensionsboard.ie) that can give you some idea of how much you should be diverting into your pension.

The calculator takes into account the State pension, which is only €209.30 a week now, or about €10,883.60 a year.

For example, to achieve a €30,000 pension at retirement, a 21 year old would need to put aside 10pc of their salary, or €6,000 a year, up to retirement. This works out at €500 a month gross, or €295 when you take account of tax relief.

However, if someone aged 41 wanted to retire on the same €30,000 pension, the contribution levels needed are entirely different.

In this case, 21pc of salary would have to be put aside, or €12,600 a year, to build up a €30,000 pension pot. This works out at €1,050 a month gross, or €620 after tax relief.

So the longer you leave organising your pension, the more expensive it works out.

- Take advantage of tax relief

Contributions paid to a pension scheme will benefit from income tax relief at your highest rate of tax.

For example, if you contribute €100 a month to your pension and you pay tax at the higher rate (ie 41pc), the net cost to you works out at €59 per month.

And there is more; your contributions will also be relieved from PRSI and the health levy if you pay these charges.

So, if you contribute €100 a week all the reliefs could mean it costs you just €53.

- Boost your contributions

Recent changes mean you can get tax relief when paying more than ever into your pension fund.

If you are under 30, you can get tax relief on up to 15pc of your salary. This raises to 20pc for those between the ages of 30 and 39, and to 25pc for those between 40-49. Anyone in the 50-54 age group, gets relief on up to 30pc of salary, and 35pc for the 55-59 age group. For those 60 and over, 40pc of salary qualifies for tax relief. One of the best ways to boost your contributions is to pay additional voluntary contributions (AVCs).

These are extra contributions you pay in addition to the normal pension contributions you or your employer make if you are a member of an employer pension plan.

- Keep charges down

Investment performance and the level of charges are key determinants of how your pension fund will do.

Choose a fund that has performed well in the past, although, unfortunately, this is no guarantee that it will continue to perform well.

What you can have a little more control over is charges, which can be a major drag on the performance of your fund.

Get a fee-based financial adviser to guide you to a nil commission pension. Otherwise, commissions will eat up you pension pot, according to Gerard Geraghty, a Westport, Co Mayo, financial adviser.

- Consider other income sources

While pension funding is a huge part in retiring, it is important to consider other elements that may also impact on post retirement income (like private assets, savings or severance payments).

Everybody's personal circumstances are different -- therefore careful consideration and planning is required in order to ensure that income needs are met post retirement, according to Veronica Gray, of Acumen and Trust.

- Be realistic

Head of pensions at Bank of Ireland, Brian Sullivan, commented: "Early retirement is a nice dream, but people need to be realistic. You only get out what you put in.

"A change of lifestyle is one way to mitigate against a reduced income in retirement, but this concept generally doesn't match-up to the retirement dream of visiting the places you always wanted to or taking a cruise around the world."

No such thing as giving up the ghost for Erskine 

When Ian Erskine retired at the age of 59, filling the void left by no longer having to go to work was not a problem.

"I don't have enough time to do all the things I want to do," he joked.

A father of four girls, he is a fan of retiring early but stresses it is important to have plenty to do.

Now 65, Mr Erskine has been retired for six and a half years. He worked for 42 years for Castrol Oil, but when that company was taken over by BP he took the opportunity to take an exit package, and has not regretted the decision.

One of the first things he and his wife Kay did was to make a list of the places they would like to travel to and they have been ticking off the destinations from the list ever since.

Clearing out the attic prompted him to sort out his mother's mementos and to continue the work she had done on an Erskine family tree.

Mr Erskine has now spent three-and-a-half years completing the family tree, a task involving tracking down distant relatives in the US, Australia and Northern Ireland.

He also plays first division table tennis and is a prize-winning grower of daffodils. In 2002, he won best in class at a Royal Horticultural Society show in London for his daffodils.

Rail trips, an interest in a vintage car jointly owned by him and his brothers and visits to museums, particularly military ones, are also on his list of activities.

A Bank of Ireland Life customer, Mr Erskine has a long list of other projects on the horizon, although he jokes that fitting it all in will be a problem.

Original Article: Irish Independent