Availing of a Pension on Retirement
A pension provides retiring farmers with a stable income, reducing financial worries and succession burdens, but requires careful planning and professional advice.
Most farm families view involving the younger generation in the running of the farm business as a positive step. It introduces a fresh pair of hands to take on some of the work and responsibility and helps ensure the farm business has a greater chance of remaining viable in the hands of a family member. However, one concern often raised is that the older generation needs assurance they will continue to have access to sufficient income to meet their needs during retirement.
To step back from farming and forgo the income it generates, they must secure an alternative income source. This is especially significant if there are minor dependent children, at school or university, who still require financial support. In some cases, while parents wish to involve a son or daughter in the business meaningfully, the farm’s scale may not provide enough income to support two families.
Life expectancy is increasing due to advances in medicine and lifestyle improvements. This means the older generation will need income and support for a longer period than in the past. To address these concerns, it is crucial for retiring farmers to consider an alternative income source during their retirement years. A pension is one such source, and pension planning should form a core part of the long-term succession plan for the farm. For a pension to significantly contribute to the succession process, it must be established and maintained early in the farmer's career.
Pension Planning in Action
Planning for future retirement income involves two main sources: the state pension scheme and private pensions. Notably, it is possible to receive both types of pensions simultaneously, subject to certain conditions. A key aspect of accessing pension income is early planning. Farmers should identify the qualifying conditions for pensions, decide on their approach, and initiate planning promptly. Failing to contribute adequately to a pension fund over the years may result in lower-than-expected pension entitlements.
The State Pension Schemes
State pensions are administered by the Department of Social Protection. Comprehensive information is available on their website, while Citizens Information also provides useful guidance.
If eligible, individuals can start receiving state pension payments at the age of 66. In September 2022, the government approved a more flexible system, enabling people to work until the age of 70 in exchange for a higher pension. This system is expected to be introduced in 2024. Over the next decade, a transition to a Total Contributions Approach is also planned.
There are currently two main categories of state pensions:
- The Contributory State Pension
- The Non-Contributory State Pension
The Contributory State Pension
This pension is available to those who have made Pay-Related Social Insurance (PRSI) contributions as part of their annual tax payments during their working life. Contributions must begin before the age of 56, and entitlement depends on the total contributions paid (a minimum of 10 years' contributions is required) and the average contributions made annually during one's career.
PRSI contributions are currently set at 4% of all farming income. Unlike the means-tested Non-Contributory Pension, the Contributory Pension is not affected by other income or assets, although qualified adult dependant payments are means-tested.
Spouses of self-employed farmers can also make PRSI contributions, provided their income from all sources exceeds the minimum insurability threshold of €5,000. Payments are made at the PRSI Class S rate of 4%, with a minimum annual payment of €500. Over time, these contributions can help the spouse qualify for their own contributory pension.
The Non-Contributory State Pension
This pension is available to individuals aged 66 and over who do not meet the contribution requirements for the Contributory Pension. However, it is means-tested, so cash income, savings, and property are considered in determining eligibility. For married couples, the total income is divided equally to calculate the means of each individual.
Private Pensions
Farmers, like other self-employed people, also have the option to pay into a private pension. Many people take the option to pay into a private pension to avail of the tax relief on the pension payments while they are earning income while also expecting to bolster their post-retirement income when they eventually start to draw down their pension. Most pension schemes involve making regular payments which are paid to a pension provider who invests the money in an investment fund. On reaching the relevant retirement age the fund is then used to pay out a pension to the retiree.
By making the regular contributions the aim is to build up a potential fund which will later be available to draw down against when you “retire” according to the rules of the fund which is normally between the ages of 60 & 75.
Depending on the particular scheme and if you have the income to do so, you can continue to make contributions to a personal pension or Personal Retirement Savings Account (PRSA) and avail of the tax relief on the contributions until you reach the later retirement age of 75 and then begin to draw it down. There are complex rules governing how you may draw down your pension fund on retirement but generally you can withdraw a certain percentage of the total fund tax -free on retirement with the remainder of the fund being used to fund a regular pension payment.
The issue of what happens your pension fund when you die is also something you should clarify but the recent pension plans called Approved Retirement Funds usually pass into your estate for distribution and will be subject to the normal taxes on distribution.
To set up a private pension you should talk to your financial adviser (usually your accountant) who will advise how to start the application process. They may direct you to a pension provider who will assist in picking the correct pension fund based on your requirements and profile. Select an adviser that is indpendent and is not tied on a commission basis to a small number of pension providers. Make sure that the adviser takes time to clearly explain any pension plan you are committing to before you sign up to the plan.
General Information on Pensions
General information on pensions is also available from The Pensions Authority
The Citizens Information Board also provide useful summaries on pensions.