HomeRetirementWhat Is A Retirement Plan And Why Having One Is Essential

What Is A Retirement Plan And Why Having One Is Essential

The past few decades have seen massive changes in the way we prepare for our retirement. With increased life expectancy and government pension schemes creaking at the edges, the onus is far more on the individual to make sure provisions are in place for a long and happy retirement.

With this shift of responsibility, a retirement plan should be one of life’s biggest priorities. A lifetime of working hard deserves a long and happy retirement, and this article offers plenty of great advice to help you get there.

What is a Retirement Plan?

A retirement plan is exactly as it sounds – It is a plan to help you prepare for retirement. Whilst there are other considerations such as health care provisions, mostly a retirement plan will be focused on ensuring we have enough wealth to allow us to enjoy the dream retirement.

Not more than a generation ago, for most of us, the state pension and a little work pension would be the norm. But today, we stay healthier longer and have higher expectations of what to expect from our retirement. So, we need to think bigger than our forebears did, and this is where a retirement plan comes in.

Planning For Your Retirement – Pensions

When we think of retirement plans, the first thing that springs to mind is pensions. However, a retirement plan should not be considered just as a pension plan – Although, without a doubt, a major part of any retirement plan is a pension.

1. A Concise Definition Of a Pension Plan is

A pension plan is a method of saving up for your retirement. It is an advanced form of savings account into which you and possibly your employer make regular payments. One major factor that differentiates it from standard saving accounts is that you get tax relief on these payments.

Most of us will be eligible for a state pension, but for the sake of this article, we will focus on private and workplace pension schemes.

2. Workplace Pension Schemes

Today, in Ireland and the UK, employers have to offer a pension scheme by law. A workplace pension plan takes contributions from the source, direct from your salary.

If you qualify for automatic enrolment into a pension scheme, then employers are obliged to contribute. The criteria for automatic enrolment into a workplace pension scheme include: 

  • Aged between 22 and the current state pension age
  • Earning more than €10,000 per year
  • Working in the relevant country

If you’re not eligible for automatic enrolment but are still part of a workplace pension scheme, then employers are not obliged to make contributions. Workplace pensions should be a cornerstone of any retirement plan, as well as offering tax relief on your pension savings. Many schemes come with other benefits, including: 

  • A pension is still paid if you have to retire early due to ill-health
  • Insurance schemes that offer a pension and/or a lump sum to dependants if the contributor dies while still in employment
  • Pensions continue for your spouse or civil partner after you die

3. Private Pension Schemes

Private pension plans are similar to workplace pension schemes. The major difference is that you set them up yourself. There are advantages and disadvantages of this type of scheme when compared to workplace pension schemes.

Advantages of Private Pension Schemes

  • Can be used to top up your retirement income
  • More control over how your money is invested and how much risk you are willing to take with your investments
  • Tax relief is available (although there are limits on the amount of relief available)
  • Suitable for self-employed or those who have opted out of workplace pension schemes
  • Control over the amount invested

Disadvantages of Private Pension Schemes

  • Employers are not obliged to make contributions
  • Many benefits of workplace pension schemes don’t apply
  • Can be riskier

Private pension schemes are a fantastic way of putting extra money aside for your retirement. While it is easy to think of these as unnecessary expenses, it is healthier to remember that in practical terms, you are giving up current disposable income to be offset by a rise in pension income.

A retirement plan will generally be built around pensions but can also constitute other factors like investments, which are covered in more detail below.

Other Factors to Consider in a Retirement Plan

As mentioned, a pension scheme or scheme should be the foundation of any retirement plan. But for true financial independence into your retirement years, pension schemes should be backed up by other factors to make a complete retirement plan.

  • Debts – A healthy pension plan should aim to make sure you are clear of debts such as mortgages, etc. by retirement age
  • Investments and Savings – Separate from your pension funds, it is wise to build as large a nest egg as possible to make the financial transition from salaried to retirement as smooth as possible.
  • Healthcare – Ensuring that you are covered for the increase in health expenses as you age should be considered. Although health services will cover much of this, it is wise to consider possible care plans required as you age or private health plans.

Putting together a Retirement Plan

No two individuals are the same when it comes to considering retirement goals and dreams. A retirement plan needs to be personal, and a wide range of factors should be considered in the plan. The most common elements that affect how you plan for retirement include:

  • Time – Time is critical in retirement planning. The sooner you begin planning for your retirement, the better. This allows you to spread the cost over a longer period, allows for greater returns on investment, and long-term investing also smooths out financial market vagaries.
  • Retirement age – Put simply, the earlier you want to retire, the more effort needs to be put into building your retirement funds.
  • Retirement Intentions – Those who have always dreamed of spending their retirement traveling the world will require more funds than those who foresee a quiet life pottering in the garden.

Unless you are a financial wizard with an understanding of tax laws and stock markets, then the easiest way to ensure you are heading for a dream retirement and not a nasty shock is to consult with a qualified financial advisor.

Financial advisors can tailor retirement plans that are specifically designed to meet your retirement goals from your current position.

Happy Retirement!

To enjoy a long and happy retirement, you need to plan, and the earlier you begin the process, the better. We all deserve to enjoy our retirement, and it is in our own hands as to how much financial freedom we have when the big day comes.

Remember that when it comes to making complex decisions, you don’t need to be on your own. Financial advisers can offer impartial advice on how to maximize your retirement plan.

Sound financial advice at any stage of the process can make sure your retirement dreams come true.

Ajeet Sharma, the founder of Financegab and a well-known name in the field of financial blogging. Blogging since 2017, he has the expertise and excellent knowledge about personal finance. Financegab is all about personal finance which aims to create awareness among people about personal finance and help them to make smart, well-informed financial decisions.


Most Popular