Why should a person save to a pension instead of a savings account and vice versa? There is an argument for both cases but I will briefly outline some essential differences here.

 

Savings Account/Policy

These are usually for a shorter term than pensions. The money saved is usually accessible either on the spot or within a few days of request. However, beware of early encashment penalties on some accounts or policies.

Savings accounts or savings policies tend to be better options for short to medium term goals, for example, children’s education costs, a new car, a deposit for a house purchase etc.

Any profit on a savings policy is subject to tax. Depending on the account or policy, this can either be DIRT or Exit Tax.

 

Pension

Pensions are usually for a longer term than a regular savings account or policy. This is not always the case as some people don’t start saving into a pension until close to retirement age. However, in most instances these will be long term policies.

The earliest a person can access money from a personal pension is 60. This means pensions are not usually suitable as savings vehicles for short term goals but they can ensure you have money saved once you reach retirement age.

One of the big advantages of a pension policy is that a contributor to one should receive income tax relief on any money paid to it and will also be entitled to a significant portion of the accumulated amount tax free at maturity. The balance may be subject to some level of income tax, depending on the individual’s situation.

 

In an ideal world, a person would be contributing to both a savings and a pension policy and be in tune with their short and long term financial requirements. However, a number of variables can affect this, most obviously affordability. Speaking to a financial advisor is the first step to ensuring both needs are addressed. If you would like more information, you may contact me on 087 9308181 or gerard@proactivefinance.ie.

 

Gerard Ward

30th November 2017