When an actress like Britt Ekland states ..think of your pension and start saving. Like my father, I have been a spendthrift, and I regret that, it is time to sit up and take stock. We in Ireland are, as I keep saying, sitting on a pension timebomb and several times over the past few years, politicians have tried to address the issues. While there is a recent recommendation from the ERSI ( Economic & Research Social Institute ) to extend the pension age to age 70, it is now more important than ever to review your retirement plans no matter what age you are as there simply may not be enough government monies in the years ahead to fund the ever-increasing numbers of pensioners.
1. The background to the problem
Currently there are 677,000 pensioners over the age of 66 drawing € 243.30 per week through the State Pension. For every person who retired last year, there were 5 workers – by 2050, there will only be 2 workers but our ageing population will have grown to 1.8million by then – government payments at that time to these pensioners will be unsustainable unless something is done NOW to address the problem. While nothing has been done about the ERSI’s age recommendation, it is interesting that Germany has announced they are considering raising their retirement age to 69 by the year 2060.
According to recent research, by the year 2030 the average life expectancy of men will be 85.7 years and 87.6 years for women. Therefore, your time horizon for living on this planet may be much longer than you realise. Prepare to live a long time and make sure you have enough money to maintain your lifestyle as these retirement savings will need to last..
2. Who is affected ?
Every individual has to take responsibility for their pension planning and not rely on others to do it for them. You are never too young to start a pension – the younger the better.
Granted, a lot of people will benefit from a pension arranged in conjunction with their employers, as employers now MUST nominate an insurance company as a Pension provider so that employees can have deductions made directly from their salaries should the employee wish to contribute to a pension plan. Failure to nominate by the employer can result in a fine of up to € 15,000.
Other employees have already taken responsibility themselves and started private pension plans while others will use alternative investments to fund their retirement. However, there is still a significant percentage of the working population who for whatever reason have decided to ignore this problem. In fact, close on 55% of the working population currently have no pension plan in place at all.
3. Why a pension ?
When you stop working financially, you will need an income from some other source to continue living. While some of your monthly costs may be less when you are retired, you will still have sizeable expenses especially if you wish to fulfil life dreams and bucket lists. A pension is a savings plan withdrawable on retirement which attracts three specific tax breaks:
- Tax relief on the contribution that you make to your pension at your marginal rate of tax
- Tax free growth in the pension fund
- The availability of a tax free lump sum from the pension fund at retirement age of up to 25% of the fund to a maximum of € 200,000 ( you can take another € 300,000 at 20% tax rate IF your pension fund hits the maximum allowable of € 2million )
4. What’s the first step ?
Do an annual budget. Ask yourself if you could you live on € 243.30 per week ? However the question you must answer is can you afford to make any pension contributions at all ? Ideally you SHOULD be maximising that tax relief.
Age % of Income that can be contributed to your pension
20 – 29 15%
30 – 39 20%
40 – 49 25%
50 – 54 30%
55 – 59 35%
5. Pension options
The type of pension you start is determined by your employment status :
A Company Director can start an Executive Pension Plan or a Small Self Administered Pension - SSAPs ( another name is the Self Directed Trust )
An Employee in a company that has a pension provision will be a member of a Company or Group Pension. This is also called an Occupational Pension Plan. He/she can also make additional contributions to the pension plan by way of an Additional Voluntary Contribution - AVCs
An Employee who works for a company but does not have a pension arrangement can start a Personal Pension Plan, a Personal Retirement Savings Account (PRSA).
A Self Employed Individual can start a Personal Pension Plan, a Personal Retirement Savings Account (PRSA) or a Self Invested Personal Pension.
An Unemployed Individual or a Homemaker can start a Personal Retirement Savings Account (PRSA). However, as they may have no taxable income, they cannot claim tax relief on the monthly contributions.
The one word for all the above is START.
6. What should we do now once the pension plan is in place ?
You can work out with your adviser the amount of money on a monthly basis you will need to keep you in the luxury you have become accustomed to when you retire. This will include inflation, your attitude to risk and your primary retirement objective – e.g. do you have any desire to leave assets behind and merely wish to have enough income to see out your days ? You will also need to have an investment strategy put in place. Your fund also needs to grow.
7. Review and review..
It is really important that you review your pension on a regular basis i.e. at least once a year. The size of your pension fund is driven by a number of factors – the performance of the assets your pension is invested in, fees and charges, the contributions that you make and the length of time between starting the pension and retirement age.
Most pensions are invested in a mixture of Shares, Property, Bonds and Cash. Fortunately, over the last 10 years, other than cash, these asset classes bar bank shares have grown handsomely all but the last stagnant 9 months of 2018. The market is already up c. 9% since January of this year, prolonging the Bull market – now the 2nd longest and 3 years shy of the longest.. 1987 – 2000 when the dotcom bubble burst . But just like 10 years ago, we could experience another “correction” – the next and 26th Bear market. For an individual with over 10 years to retirement age, this should not be an issue. However, for those people who are closer to retirement age, there could be a detrimental effect on the final income that they will receive at retirement due to timing.. Therefore, it is crucial to review your pension every year.
8. Am sorted – my employer is contributing…
Having an employer make a contribution to your pension is very advantageous for two reasons:
- The contribution that your employer makes is not taxable either as an income or a Benefit in Kind
- It increases the overall contribution that goes into your pension fund
- By 2022, with auto-enrolment, the employers will be FORCED to pay into their employees pensions…
However, many people who are lulled into a false sense of security because they are in an employer sponsored pension. They believe that this pension is somehow guaranteed and that it does not need to be reviewed, whether a Defined Benefit Pension (DB) or a Defined Contribution Pension (DC). Many also believe 5% contribution from the employer along with their own 5% will suffice for their future retirement income. Try living off 10% now !
If you are in an employer sponsored pension, you should still review this pension on a regular basis as well whether DB or DC. 80% of DBs are and were under water….
9. Obtaining independent advice
When you meet an adviser for the first time, you should be given a Terms of Business. This will tell you what insurance and investment agencies the adviser maintains plus how the adviser earns their fees. Most firms are paid by the insurance companies. It is important therefore for you to know the remuneration the adviser earns from doing business with you.
10. The 48 hour rule…
For most people, apathy ignorance and lack of time are the three killjoys when it comes to making decisions on pensions and most things financial. Another factor is the 48 hour rule. Attending a seminar or reading an article such as this is a complete waste of time if firstly this is relevant to you and secondly you then do not act on it within 48 hours. Start now before it is too late.
If you have any questions in relation to this article or need help in solving any other financial problem contact its author John Lowe, Fellow of the Institute of Bankers and Personal Insolvency Practitioner, is managing director of Providence Finance Services Ltd, trading as Money Doctor and based in Stillorgan Co Dublin. He is author of # 1 best-seller The Money Doctor 2020 (O’Brien Press € 12.99) For newsletter tel +353 1 278 5555, email firstname.lastname@example.org or the website… www.independentfinancialadvice.ie