Elusive quest for a 'gold-plated' pension
The traditional definition of a gold-plated pension is a tax-free lump sum of 1.5 times your final salary and a guaranteed pension for life, of half of your final salary. If you die first in retirement, your spouse will get 50 per cent of that.
The recent cabinet decision to allow high earners tax relief on up to €2.8 million in a pension pot was destined to be divisive. For the most part, the delighted were wealthy, while the consternated were not.
Amongst the latter cohort, were high profile individuals, who both care about the financial fate of low earners and rely on their votes to maintain the high earnings they themselves enjoy.
At the heart of the outrage was inequity. The average pension pot of €111,000 is sparse. Worse, it’s not enough to provide the 50% of final salary that’s deemed an optimal retirement income. The ‘some pensions are more equal than others’ realisation gains momentum every few years. Usually, it involves the phrase ‘gold plated’ pensions getting bandied about a lot in the ensuing debates and commentary. This time was no different.
Traditionally, the finer details of pension schemes are not something about which most are familiar. But when something — even a fixed sum paid regularly to a person — is described in such glittering terms, it attracts attention and provokes thought. So much so that people got to pondering: What on this earth a gold plated pension could be.
Throwing light on the topic, Fergus Hanly, founding director of F.J. Hanly & Associates, at Prior’s-Land, Limerick, has much to say: “A gold-plated pension may be the dream of many, but it’s the reality for only a few, especially for those working in the private sector.
“The traditional definition of a gold-plated pension is a tax-free lump sum of 1.5 times your final salary and a guaranteed pension for life, of half of your final salary. If you die first in retirement, your spouse will get 50% of that.”
While it’s a good pension, it’s not speedily acquired. “To achieve it requires a lifetime commitment to the job, of usually 40 years, as a public sector employee," says Hanly. “Those working in the private sector would need to be a member of a Defined Benefit (DB) pension scheme for just as long. Add in a bit of inflation protection to the pension in payment, and you’re on the pig’s back.”
While that phrase is associated with being fortunate, it sounds precarious.
“Most private sector employers are winding up Defined Benefit (DB) pension schemes, as they no longer want to bear the cost and risk,” says Hanly. “Instead, they are opting for Defined Contribution (DC) schemes, where your annual pension in retirement will depend on the contributions to that pension plan during your working life, and the performance of the funds you invest in.
“Fortunately, markets have been performing well, with good pension funds producing an average annual return of 10% over the last decade.”
Hanly then poses a question which he answers himself. “When you get to retirement in a DC scheme, PRSA or personal pension for the self-employed, take 25% of your pension fund as a tax-free lump sum instead of 1.5 times your salary, then put the balance into an Approved Retirement Fund (ARF), what happens next?
“Unlike the DB Pension and the guaranteed income in retirement that dies with you, the ARF is an asset you own, the value of which you can pass to your estate on death. But in retirement, you draw your pension/income from the ARF, and like any asset the value may go up. Your income is delivered from Investment gains and the ARF can also appreciate in value.
Hanly concludes that in this way ‘maybe, just maybe’ this equates to a new, more modern definition of a gold-plated pension, such as a well-managed pension fund and at retirement a well-structured and managed performing ARF.
Another who is completely au fait with the concept of gold-plated pensions is Kieran McAuliffe, director at Provest Private Clients Limited in Douglas, Cork. When asked to explain what a ‘gold-plated’ pension is, he replies: “It’s a Defined Benefit (DB) pension. A DB pension is often referred to as a ‘gold-plated’ pension.
“This is because they provide a guaranteed, sometimes index-linked income in retirement. Some of these schemes will also provide provision to pay a pension to a spouse or civil partner in the event of the death of the retiree.” Acknowledging that DB pensions have traditionally been provided by large companies and the public service, he says: “In recent years, we have seen large companies move away from DB Pensions due to the rising costs associated with running them.
“Many employers have now moved to a Defined Contribution (DC) pension scheme model which in general should be more cost effective for them to run, but may provide a reduced level of retirement income for their employees.”
Referencing Irish Pensions Authority statistics to support his point he says: “The number of ‘continuing’ DB schemes in the private sector, which includes active and ‘frozen’ schemes, fell from 558 to 526 in 2021. It’s likely that this number has fallen further since.” Noting that the public service has also adjusted its model to a more cost effective scheme, he refers to the Single Public Service Pension Scheme that launched on 1 January 2013.”
“From that date, newly appointed pensionable public servants generally became members of the Single Scheme, which is a career-average defined benefit pension scheme” Elaborating, he says: “In general, if you joined the public service before 1 January 2013 your pension will be based upon your final pensionable salary. Most public servants spend many years climbing the ladder of salary scales, so for those hired after 1 January 2013, their pension will be based on their career average pension, rather than their final pensionable salary.”
McAuliffe says that unless you are employed by the public service, or your private sector employer has a DB pension scheme that’s still open to new entrants, you are unlikely to be able to get access to a DB pension.
“Instead, you can access a Defined Contribution (DC) pension, whereby the level of pension you are entitled to at retirement, is dictated by the value of the fund you build up.”
Acknowledging that many employers operate a Defined Contribution (DC) pension scheme or Personal Retirement Savings Account (PRSA) for staff, he continues: “For those employers who do not currently have pension provision for staff, the new auto-enrolment pension savings scheme is expected to be introduced in 2025. Employees will be automatically enrolled in this new pension scheme if they are an employee not currently part of a pension plan, earning over €20,000 each year and aged between 23 and 60.”
To improve their retirement prospects, McAuliffe says that along with starting their pension contributions as early as possible, pension savers can do more: “They should seek out a cost-effective pension solution, as high charges can erode your value over time,” he says. “For those whose lifestyle dictates, it’s also a good idea to make use of the age-related thresholds and tax relief each year.”
Referencing an Irish Association of Pension Funds (IAPF) DC survey published in 2020, he says: “This suggested that at that time the average total contribution paid for employees of DC schemes was between ten and 11% of earnings. Then offering yet more words of wisdom he says: “Invest in higher growth, but obviously higher volatile investment funds when you are younger, so as to get the most growth while being able to tolerate investment volatility. Also, check in with an impartial advisor to review your pension periodically. Finally, top up your pension whenever you can, as your lifestyle dictates.”
The following case study was supplied to the Irish Examiner by Fergus Hanly, founding director of F J Hanly & Associates. It reflects the experience of a client of F J Hanly & Associates who set up an ARF in 2016. To protect that client’s privacy, they will be referred to as ‘Mr Flannery’ (name changed) here.
In the realm of retirement planning, the journey of Mr. Flannery (name changed for confidential reasons) through his Approved Retirement Fund (ARF), offers an insightful case study into effective pension management and Investment strategy. Here, we’ll dissect the elements that contributed to the success of Mr. Flannery’s ARF, providing valuable lessons for individuals aiming to optimise their retirement funds.
Mr Flannery, a senior manager in the medical sector, retired at the age of 65. Upon maturing his pension, he had a value of €949,184 from his pension plan. After taking a 25% lump sum, he invested the remaining €711,888 into an ARF in September 2016. This case study begins with his initial investment and tracks its growth over the years.
The strategic approach proposed for Mr. Flannery was to invest 100% of his ARF in a risk level 5 portfolio, as this was his risk profile. This portfolio has a medium to high risk profile, with a risk rating of 5-6 on a scale of 1-7 (7 being the highest risk). This portfolio’s allocation was predominantly in equities but was carefully constructed using a highly diversified portfolio of assets and using one or two other strategies developed by F J Hanly & Associates in over 30 years of experience and expertise. This diversified strategy was tailored to balance fund growth with risk management, aiming to maximise returns.
Over the years, Mr. Flannery’s ARF experienced substantial growth. Starting with an initial amount of €711,888, the fund value escalated to €1,024,671 by September 2024.
From 2016 to 2024, Mr. Flannery enjoyed a total pension income of €306,524 from his ARF also, demonstrating the fund’s capability to support his financial needs during retirement. This aspect is crucial, as it highlights the dual utility of ARF’s in providing both a sustainable income stream and capital appreciation.
- Mr Flannery’s choice to diversify his investments within the portfolio has evidently paid off, emphasising the importance of a balanced/growth portfolio in achieving long-term financial goals.
- Opting for a fund with a medium to high-risk rating helped in navigating market volatility, while securing appreciable returns, showcasing the significance of aligning investment choices with one’s risk tolerance and retirement timeline.
- Engage a highly experienced and impartial financial advisor. The success of an ARF also depends on continuous monitoring and realignment of investment strategies from your financial advisor, based on market conditions and personal circumstances, underscoring the need for active financial management.
Mr. Flannery’s experience with his ARF illustrates a well-executed retirement strategy, bolstered by thoughtful investment choices and proactive financial planning. His story serves as an inspiration and a guide for individuals planning their retirement, highlighting the importance of understanding risk, diversification, and the need for an adaptable approach to fund management.
This case study not only sheds light on the mechanics of an ARF, but also reinforces the benefits of meticulous planning and expert guidance in navigating the complexities of retirement investments.
For anyone looking to secure their financial future post-retirement, taking a leaf out of Mr. Flannery’s book could be the first step towards achieving similar financial independence and security. Be sure to engage an experienced financial advisor.
Disclaimer: Fund performances are not guaranteed and can be better or worse than assumed. Capital is not guaranteed when invested in many unit linked funds.
