It is very important that each person plans for his or her financial future in retirement. The world is becoming an expensive place and people are living longer and many choose to retire before age 65, when they are still active both mentally and physically, so you see there is much to ponder in the planning for retirement. Nowadays with increased life expectancy you can be planning for anything up to 30 years post retirement!
The sooner you start planning for what will happen in the future,
the sooner you will be on your way to making it happen.
You will also need to consider the tax implications in drafting your will and ensuring that your estate can pass to the next generation as tax efficiently as possible. Failing to plan here can have very expensive consequences.
Mannion Lochrin & Co are here to help you in deciphering the many choices you will have to make along with giving you practical advice as to how to proceed. So if you want that nest egg for the children, that yacht in the bay, the overseas holidays or whatever you want when you retire then our advice is to commence planning today. It’s never early and it’s never too late.
WHAT ARE THE OPTIONS?
So what do you need to be thinking about? Responsibility for providing an income in retirement is shared between the State, employers and individuals. Three pillars of retirement provision can be identified:-
- State pensions provided under the social insurance and social assistance systems;
- Occupational pensions provided through employer sponsored pension schemes in both the public and private sector, or personal pensions (including PRSAs) designed for the self-employed and those in non-pensionable employments;
- Private savings and wealth.
A pension is still one of the most tax efficient ways to replace earnings at retirement so as to maintain one’s standard of living during retirement and to provide an adequate future income for dependants. So pensions and retirement planning go hand in hand.
a PRSI derived old age contributory pension;
a PRSI derived widow’s contributory pension;
a means tested old age non-contributory pension;
a means tested widow’s non-contributory pension.
Current State social welfare pensions are not in themselves sufficient for many people to maintain a reasonable standard of living in retirement, so some form of additional income provision will be needed.
There are a number of avenues open to an individual in providing for their own pension planning. The government has been increasingly active in recent years in encouraging people to plan for their own retirement (thereby reducing the potential future burden on the state). To this end they have created a favourable taxation regime to promote the investment by individuals into their pension funds.
- Your retirement will be financially secure
- Your children will be adequately catered for
Personal circumstances will dictate how you prioritise each of these goals but it will be difficult to satisfy No 2 unless you look after No 1. We have already seen some of the options available in pension planning however there are other ways to ensure financial security in retirement.
ESTATE PLANNING…WHY BOTHER?
One area of financial planning that is often overlooked is the area of planning for one’s estate. Tax is payable on certain assets distributed after your death but with astute planning this burden can be significantly reduced and often eliminated with the appropriate planning and action. Mannion Lochrin & Co Ltd do understand the needs of parents to manage their retirement and to plan for their estate distribution so advice in this area, particularly in relation to the tax aspects is crucial
Mistakes in this area are hard to rectify and remember you won’t be around to help!
Firstly let’s outline the process for someone who dies and doesn’t leave a valid will. In this case the estate is divided in accordance with the 1965 Succession Act.
If you are married with children then your spouse gets 2/3 and your children get 1/3 equally amongst them. If there are no children then your spouse gets the entire estate and if there is no spouse the children get the entire estate. In certain circumstances children can include grand children.
If there is no spouse or children then the estate passes to the surviving parents, and if no surviving parents then it goes to surviving siblings and if there are no surviving siblings the estate passes to nieces and nephews. This process continues until the surviving relatives are exhausted in the order stipulated by the Succession Act.
Let’s suppose you have or wish to put a valid will in place, what are the financial considerations you need to consider. The principal tax you need to be aware of is Inheritance tax which is a subset of Capital Acquisitions tax (CAT). This tax is on the taxable value of the estate and is payable by the beneficiary. There are numerous cases of people having to sell the property they were left under a will simply to pay the inheritance tax so planning is essential here to try to avoid such a scenario.
The taxable value of an estate is the market value of the inheritance less the personal inheritance gains tax threshold of the beneficiary. For inheritances by a spouse these are exempt from CAT and there are also some exemptions for certain asset types such as certain farming and business assets and the principal private residence.
Another area to consider in the situation around Enduring Power of Attorney (EPA). This document stipulates what your wishes are for your personal care and/or your business & financial affairs if you are mentally incapacitated and not able to act for yourself. The 1996 Powers of Attorney Act introduced the EPA which if completed in the manner set out in the legislation and then registered, operates after the person has become mentally incapable thus allowing a trusted person to continue to care for the person and avoids the inconvenience and expense of the supervision of the Courts.
The EPA covers situations where a person becomes mentally incapable, for example as a result of an accident or a stroke and can no longer be said to be able to discharge his or her own affairs. AN EPA document records the wishes of the person so that even in their incapacitated state their affairs are handled in accordance with their wishes. In the absence of an EPA then matters can become quite complicated and even involve the courts deciding what happens to a person and their affairs even though they are still alive.
Decide you absolutely need a will or re-consider your existing will in light of taxation and legal issues discussed here.
Consider putting an EPA in place.
Identify all your assets.
Identify what assets you wish to leave to whom.
Is this plan likely to trigger a CAT liability for the beneficiary?
Will they have the means to discharge this liability without a forced sale on the asset?
Consider your options (like selling the asset before you die).
Are you using all the CAT threshold of all your children?
Contact our office to review your needs and to allow us to help you plan one of the most important decisions of your life and to manage the tax implications if your decisions..