Properly funded retirement: The joy of doing nothing
If you take on expert advice on planning your pension, you may be looking forward to enjoying plenty of time in retirement after many years of hard work. Photo: iStock
"Retirement is wonderful. It's doing nothing without worrying about getting caught at it."
- Gene Perret
This is the dream for many, but the challenge is how will you fund it? Pension coverage in Ireland remains low with for some the cost of living challenging the ability to save. However, other contributing factors such as lack of understanding and inertia are significant impediments that can be overcome.
Women continue to lag behind men in terms of adequate pension coverage. The pension landscape is changing and it is likely that we’ll all have to make decisions very soon about how to fund our future.
There is plenty good news such as healthy employment levels, the exchequer results indicate that the State’s finances are in good shape indicating they are equipped to cover the cost of State pension benefits into the future and we are living longer. So you may be looking forward to enjoying plenty of time in retirement after many years of hard work.
Bank of Ireland, in conjunction with Red C carried out extensive research on the views of Irish people on saving for their retirement. Some of the key findings were as follows:
- Almost three quarters (74%) told us that the rising cost of living has forced them to put day-to-day spending needs ahead of saving for the future
- Less than half (46%) understand how pensions work and only 39% are comfortable with the tax breaks that come with retirement savings. However only about 1 in 5 (22%) have ever sought advice from a professional advisor
- 38% of us are thinking more about our retirement than before. Of those who have a plan in place, the majority are worried that we are not saving enough (62%) and few are confident that their plans will give them a decent lifestyle in retirement (28%)
- When asked what advice you would give a “younger you”, almost half (49%) suggested starting saving for retirement earlier and building it up over time.
The rising cost of living has put strain on family finances, but on the other hand, Central Bank data shows that household deposits have been rising this year. Perhaps there is a heightened fear of planning too far over the immediate horizon with the experience of COVID and lockdown so near in our rear view mirrors. But we are, as a nation, continuing to save, however not in a manner that will help to fund your future. Going through a good advice process can help you identify what you need for day-to-day spending and what you can afford to put aside to fund your future.
While the tax advantages of putting money into a pension remain truly compelling, many do not seem to value them enough to put money aside for their future. A marginal rate tax payer (typically paying the 40% rate) can reduce the cost of putting €100 into their retirement plan by €40. While your money is invested, it can grow tax free and you can draw down a considerable amount tax free when you do come to retire. These are compelling reasons to use the pension system to save for the future.
But why don’t we seem to recognise the benefits of tax incentives to save. The statistics around pensions have not changed much in recent years and the problem of people retiring without a decent income is getting progressively worse. So, what is coming down the track next year to help peoples participation is a mandatory auto enrolment pension system. This should be welcomed as it should lead to improved pension coverage for over 750,000 workers. This will apply to employees but the self-employed, as always, will have to make decisions for themselves on their retirement plans.
Lack of understanding of pensions remains a problem, as is borne out by the Bank of Ireland/Red C survey. When we see something as complex, we tend to shy away from making the decisions that can be in our best interest. Inertia and lack of understanding can hold us back from making the right decisions. The new auto enrolment model should address some of these issues. If you are currently not in a qualifying pension arrangement, are aged between 23 and 60, earning over €20,000 p.a. you will be automatically signed up for a new mandatory arrangement. It is due to begin in the second half of next year. Employers and employees will contribute 1.5% each and the State will an additional 0.5% by way of a contribution, as opposed to tax relief.
The new system will offer a limited choice of investment solutions and there does not appear to be a facility to enhance your fund size via Additional Voluntary Contributions (AVC’s). The conventional Occupational Pension Scheme (OPS) can act as an effective solution, once it complies with the requirements. There is a risk that the contribution rates under the mandatory scheme will be viewed as the required standard when they really only reach some semblance of adequacy in the later stages of the roll out of the scheme after year nine.
We highlighted poor pension coverage for women and it would be interesting to see some creative approaches introduced to the final scheme that could factor in the reality that some women will take time from the paid workforce to care for family members. Perhaps continuing the State contribution during such periods may help maintain some inflows into their pension pots but these details are still to be outlined by the Government in the coming months.
In summary, if we go back to Gene Peret and desire to spend time “doing nothing,” we need a plan to get us there. There are new ways of achieving this through the mandatory scheme but the existing regime offers so much more, particularly to top-rate tax payers. People are anxious about their financial future and that can be alleviated by getting good advice from a professional on the choices available to fund your future and deliver the outcomes you deserve.
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