Income protection policy is worth considering
Q I am a sole trader in my late 40's. I am paying into a Pension for my retirement but I am conscious that my health is a crucial aspect of my ability to run and manage my business and that the effects of ill health would seriously affect my income. Should I consider having some form of income protection insurance in place or could I access my pension on grounds of ill health before retirement at 60?
A Your query in relation to the possibility of accessing your Pension before retirement age will depend on the type of Pension scheme you have in place as there are different definitions of ill health and different benefits payable depending on whether you have a Personal Pension or PRSA. As a general rule of thumb, it is very difficult to satisfy the Revenue definitions of ill health in order to access your Pension before normal retirement age.
Example: Mark is self employed, earning €40,000 per year. He has income protection cover of €30,000 per year. Due to an illness Mark is no longer able to work and is not entitled to any sick pay or social welfare. Mark would receive a taxable benefit of €2500 per month from his insurer for as long as he cannot work for the duration of his policy.
COMPANY PENSION SCHEME
Ill health early retirement under a company pension scheme has been defined by Revenue as involving a physical or mental deterioration which is serious enough to prevent an employee from carrying on his normal employment. Ill health is not allowed in cases such as a decline in energy levels or ability.
PERSONAL PENSION OR PRSA
If you have a Personal Pension or PRSA in place the definition of ill health is slightly different again. It requires the individual to be permanently incapable through infirmity of mind or body of carrying on his own occupation or any occupation of a similar nature for which he or she is trained. Again this is quite a restrictive definition.
In both of the above scenarios, and in the event that you meet the required definition of ill health, the other factor to consider is the size of your pension fund and the benefits it will provide for you. In order for it to be worth your while to access your Pension early, you would need that Pension fund to be worth a considerable sum of money. It is unlikely that in your late 40s you would have a Pension fund built up that will take care of your income needs for a further 40 years.
As you can see, there are many restrictions and hurdles that you have to cross in order to access your Pension early on grounds of ill health. Therefore I would certainly recommend that if this issue is important to you, you should have a separate tailored income protection policy in place to cater for this eventuality. My advice would be to keep your pension plan in place for the purpose for which it was intended, your retirement, and set up an Income Protection policy to cater for ill health before retirement
THE FACTS ABOUT INCOME PROTECTION
You choose how long you want the cover to last, usually to age 60 or 65. You also have a choice of how much cover you want. This is restricted to a maximum of 75% of your earnings less any state benefit you may be entitled to. Remember, if you are self-employed you may not be entitled to anything from the government
Other important points:
You have a choice of how long after injury or illness the cover commences
• You can choose 13, 26 or 52 weeks
• Tax relief is available on the premiums paid to annual limit of 10% of total income
• The benefit payable to you is taxable
Who needs this type of Protection?
• The self-employed with no other source of income
• Those with little sick pay from their employer
• Those whose sick pay only lasts for a certain length of time
• Those with dependents who rely on their income
For further information please contact Michael Coburn on 053 9170507 or email firstname.lastname@example.org