Planning ahead: Retirement age debate set to heat up again

Because we’re all living much longer these days, there may be a lot more retirement time to be paid for. It's important to look at all the options

It stands to reason that something will have to give in order to ensure adequate pension provision for future generations.

During last year’s election campaign, pensions became a thorny issue. Under pressure from all sides, the Government opted to defer the planned increase in the pensions age to 67 until it received a report from the newly formed Commission on Pensions.

That report is imminent, which means that the pensions debate is about to heat up again. The problem of course is that as the population ages, we will have less taxpayers to support those who have retired. Moreover, because we’re all living much longer these days, that’s a lot more retirement time that has to be paid for.

The big question is how we pay for it.

A just-published survey from the Independent Trustee Company (ITC) found that almost two thirds (65%) of responding pension advisers believe the Government will decide to proceed with the higher pension age if that is recommended by the commission. Some 83% expect that that’s exactly what it will recommend.

As Glenn Gaughran of the ITC points out, the increase in the retirement age has been vehemently campaigned against by some bodies, while other parties of have voiced huge support for it.

“It stands to reason that something will have to give in order to ensure adequate pension provision for future generations,” he says.

“With the majority of pension advisors believing that increasing the pension age will be the likely step taken by government towards this objective.”

“People are living longer and life expectancy is increasing, leaving a corresponding fiscal challenge for our current and future taxpaying generations to carry the burden of pension provision for more senior ones.

“Eurostat (the EU statistics agency) places the average life expectancy for Irish males at 81 and at 85 for females, meaning that persons could be in receipt of their pension for anything from 15 years to 20 years plus. Reform will be necessary to secure sufficient resources to match our increasing longevity.”

Providing for retirement is one thing. Providing enough for retirement is quite another. 

If your pension contributions won’t deliver the lifestyle you want at retirement, there are ways and means of upping your contributions and/or making lump sum investments into your pension pot.

If you already have an occupational pension, the best way to do this is via the Additional Voluntary Contribution, or AVC. AVCs are a way of increasing your employer pension benefits if they may fall short of the maximum benefits you can get at retirement.

Basically, you decide the level of AVC you want to pay. Tax relief is available on contributions, subject to age criteria. The older you get, the greater the relief. The AVC is paid into an investment fund, which is usually invested in a mix of shares, bonds, property and cash. Like all investments of this nature, the value can fall as well as rise.

At retirement, your AVC fund is used to top up your retirement benefits. You can decide how to use the fund, within certain limitations.

You can use your AVC fund to top up your tax-free lump sum, or you can use it to transfer any balance to an Approved Retirement Fund or ARF, which you can draw down in retirement. Alternatively, you can use it to buy an annuity. This is a contract with a life insurance company that will pay a regular pension income for life in return for a capital sum.

Any balance in your ARF on death in retirement is payable to your dependants.

The CCPC offers this example

John works in the private sector. He finds out that he is entitled to take €36,000 as a maximum tax-free lump sum at retirement from his employer’s scheme. He has also built up an AVC fund worth €50,000. John decides to use €36,000 of his AVC fund to take his tax-free lump sum. This leaves him with €14,000 that he could use to buy an annuity and get an extra pension income from his employer’s scheme, invest in an ARF or take a lump sum (that he would pay tax on).

Talk to your HR department, pension administrator or your union about AVCs. Many public service unions have specific AVC schemes for their members.

The other pension boosting tool is the PRSA, the Personal Retirement Savings Account.

If there’s no facility for AVCs in your employer’s pension scheme, you can set up your own independent PRSA into which you can then pay AVCs. In this case, your contributions will not be automatically deducted from your salary before tax. You will have to arrange to pay the AVCs and claim tax relief yourself.

PRSAs

A PRSA is a type of personal pension that is more flexible than the traditional personal pension plan. Anyone up to the age of 75 can take out a PRSA and you don’t have to be earning an income to do so. If you’re employed, your employer is required by law to offer you a standard PRSA if there’s no employer pension scheme in place, or if you’re ineligible to join or access full benefits.

If you contribute to a PRSA set up by your employer, you get tax relief automatically and don’t have to claim it yourself. Your employer may also contribute to your PRSA but they don’t have to.

Note too that when you take out a PRSA, there’s a 30-day cooling off period. During this phase, you can change your mind and close the account at no penalty.

PRSAs are defined contribution schemes. The value of your pension at retirement is not guaranteed and will depend on the level of contributions you make, the growth of your pension fund and the charges you pay. More on these in a minute.

Most PRSAs allow you to pay regular monthly contributions or lump sums, and sometimes both. If you’re taking one out with the specific aim of paying in a lump sum or a series of lump sums, make sure that the PRSA allows this.

PRSAs are designed to be flexible. You can make transfers from one PRSA to another without penalty and you can also make transfers from an employer pension scheme to a PRSA.

The bad news is that PRSAs come with a range of charges and fees. You have to pay the pension provider for both setting up and managing your pension plan. As the CCPC points out, these charges can have a significant effect on the value of your pension at retirement. Ongoing yearly charges, for example, are calculated as a percentage of the amount of your fund.

So the amount charged will increase as your pension fund grows.

The other point to make here is that pensions can be complex products, so you may wish to get financial advice. The financial advisor will discuss your options and recommend a product based on suitability.