Simplifying Irish Pension Lingo

Pensions can be complicated and the language around them confusing and in many cases not user-friendly. Simplifying the language around retirement planning could go a long way to encouraging people to be more engaged with this aspect of their financial lives.

However, in the absence of an overhaul of Ireland’s pension lingo landscape, below are a few commonplace terms that would be worth noting by anyone thinking of planning for their financial future.

Annuity v ARF

As people approach their retirement, they need to understand the difference between an Annuity and an Approved Retirement Fund (ARF). An Annuity is a guaranteed annual pension which you buy with the money in your pension pot. An ARF is a personal retirement fund where you can keep the money in your pension pot invested after retirement and which you can draw down an income from.

Defined Contribution v Defined Benefit

If you are offered a company pension through work, it will usually be either a Defined Contribution (DC) or a Defined Benefit (DB) pension scheme. With a DC scheme, the value of your pension at retirement depends on how much you (and your employer, if they do so) saved into your pension and the investment performance of those savings. With a DB scheme, you’re traditionally promised a pension equivalent to half or two-thirds of your final salary.

Contribution Rate v AVC

The contribution rate is the percentage of your salary which you (and your employer, if they choose to do so) contribute to a pension scheme. For example, if an employee’s contribution rate is 5pc, the employee is contributing 5pc of their salary to the scheme.

Additional Voluntary Contributions (AVCs) are contributions to a pension scheme that are over and above the amount an employee is required to contribute under the scheme rules. They can be a particularly useful way to boost your pension pot, though it is important not to contribute more than you can get tax relief on.

For further information, please speak to your financial advisor or email service@itcgroup.ie.

Fiona Harris, ITC Marketing Manager