Big opportunity for investors as pensions sector enters new era
What Is a pension?
A pension is simply a long-term savings plan. A fundamental problem with pensions, observes Ralph Benson, co-founder and head of financial advice at Moneycube.ie, is that there is a significant lack of self-confidence around finance in Ireland.
But that’s changing, he says, through initiatives like the recent Pensions Awareness Week, and as information on pensions become more transparent and accessible.
A pension is simply a highly tax-efficient way of saving for your financial future. You get tax relief on the money you put in — for example, if you are a top-rate taxpayer, for every €60 of net pay that you put into your pension, €100 lands in your pension fund.
Who can start a pension?
Almost anyone can set up a pension — but not enough of us do it, says Ralph.
“There are a few reasons why,” he says, adding that one of them is that there is a perception that pensions are ‘difficult.’ However, pensions don’t have to be difficult. We need to encourage people to be more assertive.
"We need to give people the confidence to take control of their financial futures, and be confident in dealing with their pension,” he says, adding that the important thing is to make a start.
“Yes, there is a little work to get up and running, but once a pension is started, it ticks over nicely and you can see the growth coming through and your wealth building. We need to break the future into bite-sized slices. After two or three years you will be able to see that it really is worthwhile.”
Another reason why so many people don’t take out a pension, he says, is that the financial industry has “failed to communicate the benefits” of pensions in an easy and realistic way.
“If you are earning an income, it is almost always worthwhile to set up a pension,” he observes.
Five things you need to know about your pension
“Putting money in a pension is a very tax-efficient and great way to build wealth, especially if your employer contributes to it,” says Ralph.
So ask your employer if there is a company pension scheme and if you are in it, he says — and don’t forget to check if your employer is contributing to the company pension scheme.
“Right now, the State Pension pays up to €243 weekly. The point is, however, that this is not guaranteed and not everyone gets it, plus the age from which you can claim it is increasing.”
Check your entitlements on welfare.ie, he advises.
“There is evidence now,” Ralph observes, “that someone entering the workforce now will have more than 10 different jobs over their lifetime. The days of a job for life are gone, aAnd because you will probably have many jobs, it is likely that you will also have several pension pots.
Remember the first permanent job you got after college, or the year you spend in Australia? It all counts!
“It is important to track down pensions from old jobs, even if a company you worked for many years ago is no longer in existence. There is every chance that the pension assets are still there and that they would have built up over the years because of the portfolio’s investment performance.”
His advice is to track down pensions from old jobs and consider moving them to a single provider.
“The pension gap is the amount you need to save between now and retirement to live the way you would like to live — in other words, it is essential to know if you are on track so that you can take action now and sort out your financial future.
“We help people to form a view about what kind of income they will need at retirement. For example, if you are happy to live on 50% of your current income, you need to think about what you need to save now and every year until then, in order to create that future.”
“One of the things we have found through Pensions Awareness Week is that there is almost always something you can do today to improve your pension position,” says Ralph.
“That might involve dropping the fees you are paying for your pension, or changing the way your pension is invested, or increasing your monthly contribution, or adding a lump sum, if you get a windfall, for example in terms of a salary increase or bonus.”
How soon should I start saving for retirement?
“Whether it’s going to the gym, or minding what we eat, we’ve never been more interested in doing the right thing for our future selves. We know we’re living longer. We need to prepare financially for that future.
“The thing about pensions is that they have become a lot easier to start and maintain. The earlier you make the start, the easier it is over the long term to build up your wealth,” explains Ralph.
“If you start in your 20s, you have many, many more years to grow so you build up your wealth more.
“However it is never too late to start a pension, and we regularly help people who are in their 60s to rapidly build up their pension pot — for example with a one-off contribution.”
What about risk?
“People understandably worry about investment risk with their pension,” he acknowledges.
“However, firstly pensions are a long-term investment so they are ideal for investing into assets that can go up and down for long-term growth. What is particularly important if you are approaching retirement, is to consider what your pension is invested in and begin to move the money into lower-risk investment.
“A lot of pension plans do that automatically for people now,” he said. “It is important to remember that when you retire, you are probably looking at a 30-year time-frame. It is worth considering investing your pension in assets that can protect against inflation and offer some scope for growth.
The advice is to diversify your investment — the cornerstone of your investment strategy in retirement should be a multi-asset fund. This has a mix of company shares, Government bonds, commodities such as gold and infrastructure investments.
“Because your investment is spread across many hundreds of underlying assets you have reduced your investment risk while giving yourself many opportunities for you fund to grow.”
A recent ESRI report, he points out, has found that women’s pensions in Ireland are, on average, 35% less than men’s.
“What’s gone wrong here?” asks Ralph.
“Women’s pension provision needs action, not talk! Women live longer, work shorter, and often have lower incomes, as well as career breaks” states Ralph. “That needs to feature in their pension planning!
“Career breaks shouldn’t mean pension breaks. One possibility would be for a transfer of pension payments to the non-working partner in the household, during time off work.”
Last, but not least:
“Although there is a lot of talk about a Pensions Timebomb, it is actually a Pension Opportunity,” declares Ralph.
“We want to take away the fear around pensions. People should bear in mind that pensions are actually much better in terms of financial benefits than the very popular SSIAs of the recession years. There is better tax relief and you have more control and lower fees.
“There are two other benefits to pensions in relation to tax — your fund grows tax-free, and when you retire you can usually take 25% of the value tax-free.”
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