Lack of pension planning a 'ticking time bomb', experts warn

Huge numbers are inadequately financially prepared for the future with retirement poverty facing many, writes John Hearne.

Lack of pension planning a 'ticking time bomb', experts warn

Huge numbers are inadequately financially prepared for the future with retirement poverty facing many, writes John Hearne.

Recent figures from the CSO confirm what we all know. We’re not saving enough for retirement. Less than half (47.1%) of workers have either an occupational or a private pension.

More recent survey data suggests that things are actually worse than this. Aviva commissioned research from Red C which found that 43% of 35-54 year olds anticipate financial hardship in retirement, while 60% admit to having inadequate retirement funds.

The research, based on a representative sample of 2,000 adults, found that only 34% had a private pension. 43% admitted to having no idea how much their pension fund was worth. More than half had no idea where their funds were invested, while 55% were in the dark on the tax benefits for pensions savers.

Ticking time bomb

That sound you can hear in the background is the pensions time bomb ticking slowly down.

Richard Jones is head of life and pensions with Aviva. He says that these findings show a worrying disconnect between the pension people expect in retirement and what they are actually investing now to prepare for that retirement.

“Putting retirement planning on the long finger is also evident, with a particularly concerning lack of preparation and awareness amongst those aged 35-54 years old.”

The survey also revealed the generational shift in home ownership, and the impact this is going to have on pensions adequacy into the future. 40% of 18–34 year olds expect to be still paying a mortgage or rent into retirement, compared to only 18% of the 55+ cohort.

Overall, half of the population is likely to carry some level of debt into retirement.

‘Auto-enrolment’

The one phrase on the lips of everyone in the pensions industry is ‘auto-enrolment’. This is the inertia-busting plan to automatically enroll all employees in a pension scheme.

In February of last year, the government published an ambitious five-year plan for pension reform. One of the roadmap’s strands focuses on improving pension coverage through the introduction of a system of auto-enrolment. All employers will be legally required to automatically include their staff in a retirement savings scheme by 2022.

General Secretary of the Irish Congress of Trade Unions (ICTU), Patricia King is fully behind this move. “Congress agrees in principle with the introduction of auto-enrolment as a means of increasing pension coverage, income adequacy for retirees, and employer responsibility to contribute to their employees’ retirement savings.

Richard Jones of Aviva is on the same page. “Without a significant cultural shift in how we approach pensions, or an acceleration of plans for auto-enrolment, the signs are pointing to retirement poverty being a prevalent issue for future generations.”

Of course, there are many thousands of workers who do not qualify for company pension plans. If that’s the case, you’re looking at two basic options — the Personal Pension Plan and the Personal Retirement Savings Account (PRSA).

Personal Pension Plan

The Personal Pension plan has been with us for some time. Essentially, this is a private pension policy that’s managed for you by a life assurance company or investment firm.

If you’re self-employed or don’t have access to an employer plan, you will probably be eligible to start a personal pension plan. It’s also possible to contribute to one even if you’re already a member of an employer plan, but earn additional money elsewhere.

The PRSA

The PRSA, which has grown in popularity in the last decade, is a lot more flexible than the standard personal pension plan. It is a long-term personal account designed to enable you to save for retirement in a flexible way.

The key characteristic of the PRSA is that you can bring it with you when you change employment. You can continue to pay into it if you become self-employed or unemployed and you can switch from one PRSA to another at any time, free of charge.

If you’re in employment, you may not have to know anything more about PRSAs. The first thing to do is to check out if your company runs a pension scheme, and if you’re entitled to join. If so, go to your employer and check out the benefits of the scheme.

If there’s no scheme, if you’re not entitled to join, if you’re only included for death in service benefits or if you’re not eligible to join the scheme within six months of starting employment, then the employer is obliged by law to provide you with access to at least one standard PRSA.

The PRSA then is the catch-all of pensions provision. As the Pensions Authority points out, employees, the self-employed, homemakers, carers and the unemployed — in fact, every adult under age 75 — may take out a PRSA.

PRSAs are defined contribution plans. This means that how much you end up with by the time you begin to draw it down will depend on what you put in, how it’s invested, and of course the fees you’ll have to pay out to maintain it.

As the Competition and Consumer Protection Commission point out, PRSAs allow you to pay regular monthly contributions or lump sums, and sometimes both. It’s important to review your PRSA regularly to make sure your contributions are in line with your needs in retirement.

Necessary evils

Charges and fees are a necessary evil in pension provision. Someone has to manage your fund, and they don’t do it for nothing. You do, however, have to keep a close eye on these charges because they can have a significant impact on the value of your pension at retirement.

Ongoing yearly charges, for example, are calculated as a percentage of your fund, which means that the fee goes up as the fund grows. But that’s not the only fee.

There are allocation rates, bid/offer spreads and monthly policy fees. You will need to understand all of these in order to compare and contrast the variety of offers that are out there.

Having said all that, it is worth pointing out that with a standard PRSA, the management charge can’t be more than 5% of each contribution and 1% per annum of the fund value.

There are certain investment restrictions on standard PRSAs but the fund choice available is broad enough to meet most people’s needs.

The bottom line here is that regardless of how you provide for yourself in retirement, doing nothing is not an option.

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