Pensions are a bit like sunscreen. We know it’s necessary and we should be applying sunscreen year round to protect ourselves but it’s only when the sun comes out that we start taking it seriously.
A bit like pensions, it is only when retirement is in sight that we start to get serious about them.
Warning after warning comes that workers must start thinking about their pensions once they start work, which for many is in their 20s.
However there’s a lot more important things to worry about in our 20s like that trip to Machu Picchu. Then come our 30s and we are saving for houses, weddings and children.
When the 40s arrive, we will start to take life a bit more seriously but is it like forgetting the sunscreen — is it then too late to start thinking about that pension?
Experts say it is never too late to think about your pension. If you think you might be in the minority and have left it too late to start, a survey from the Competition and Consumer Protection Commission (CCPC) found that a quarter of Irish consumers between the ages of 55 and 64 do not have a pension in place.
At the moment, the State provides a pension of up to €253.30 per week to pensioners over age 66. There are other allowances to assist in old age, but they are means-tested. If you don’t think that €253.30 will be enough to cover your needs in retirement then you need a private pension to cover the shortfall.
Most workplaces will help set up a pension for you but if they don’t or you are self-employed there’s plenty of brokers who would be happy to help. If you decide to put some of your wage into a pension, then the amount will be deducted from your gross pay, tax free. The very positive element about pensions is that your contributions are exempt from income tax.
Mark Reilly, Pensions Proposition Lead with Royal London Ireland said that ideally, people should join a pension scheme using money from their very first paycheck.
Good in theory but in reality this could be difficult when you have other things to save for.
“The Government wants to encourage everyone to set aside money for their retirement, so there are valuable tax breaks to pension savers, whether they have their own pension plans or are in a company pension plan.”
“Pension tax relief is probably the most unappreciated gift from Government.
“When you pay money into a pension plan, the taxman will give you back part of your contributions — either 20% or 40%, depending on which is your higher rate of income tax.”
Despite the benefits of starting early however, it is never too late to start your pension plan. As a guide, experts say you should be aiming for your pension to be worth at least twice the value of home when you retire. €500,000 might sound like a big fund but might only provide you with an income of just over €1,400 a month if you live for 40 years after you retire at age 60.
Glenn Gaughran, Head of Business Development, Independent Trustee Company said how your pension will work is that when you get to retirement age, you usually get the option of getting a monthly pension for life or to have all your accumulated contributions transferred to a retirement fund, which you can draw down as you go along.
“While the option of getting a secure income may appear tantalising you should beware that the pension you receive may be bad value. It is not unusual to get around €3,500 annually for every €100,000 which you have accumulated on retirement. No surprise then that many people choose to take the €100,000 into a retirement fund instead,” he said.
Mr Gaughran points out that opting for a retirement fund carries its own risk such as the risk of running out of money.
“To avoid this, we see any pensioners buying rental property with the retirement fund, and then living off the rental income. In this manner, with a bit of careful planning you may get €5,000 to €6,000 or more, for every €100,000 invested. And you get to retain the value of the property, which can be sold in case you need money to cover health care expenses or nursing home costs.”
Mr Reilly said that when we are younger we can afford to take more investment risks with our plans.
“In your 30s, your pension fund is still relatively small and with such a long investment period ahead, you can probably afford to take some calculated investment risk to give you the best chance of getting a good return on your savings.”
One thing you will have to consider too with your pension plan is how much risk you want to take. The experts say that avoiding all risk when it comes to investments, particularly far out from retirement, is not going to stand to you in later years.