Your pension: will you be safe, or sorry?
There are only 50% of people in Ireland with an occupational pension. The State pension currently operates on a ratio of five people funding each recipient and this ratio is predicted to be at 2:1 by 2055. By the time retirement comes, women have a 35% lower income than men and at the same time they are expected to outlive them. All startling statistics.
And pensions are on everybody’s mind, as the Cassandras keep promising that the pie is getting smaller, with more and more people needing a slice of that pie. Longer life expectancy and the numerical imbalance between soon-to-retire baby-boomers and currently working (and contributing) workers point to timeless uncertainty.
But as I see it, pensions are pensions are pensions. There are many things we can do to ensure we preserve our lifestyles after employment. The important thing is to take action. So where do you start?
I was interviewed on the Sunday Business Show on 21 February 2016 and then again on 6 March on pensions. Listen to the podcasts:
21 Feb. 2016
6 March 2016
How much will your government pension be?
First of all, the government does provide pensions: a full state pension amounts to €12,000 per annum. Your annuity will depend on how much PRSI you have contributed. If your contributions haven’t reached a certain minimum, or if you have income and capital below specific levels, you will get a pension, but it will be lower.
The contributory and non-contributory pension levels are clearly stated on citizensinformation.ie, so a first step will be of course to check where you stand in that respect. And did you know that you can check your own social insurance records? That’s on welfare.ie.
Civil service pensions are another area that you will need to check if relevant. There is often an assumption that your pension will just happen to find you on your retirement. But again, knowing where you stand is best. If you are a civil servant, cspensions.gov.ie will allow you to check how much you’ve contributed, how much your pension is worth as of the day you check your records and the path to your retirement goal.
Does your employer offer an occupational pension
Private sector workers may have the opportunity of contributing to an occupational pension, one that’s provided by their employer. Unfortunately apathy is rife in this sector. Too many people, for completely understandable, yet mostly unacceptable reasons, never look into their occupational pension scheme. We don’t want to think of retirement as it’s so far away. We’ll deal with it later as there always are more pressing things on our minds.
And then the time of life that’s the best time to harness the power of compounding also happens to be the time when there are the most demands on our limited income. Compounding is what happens when your savings and investments earn interest on interest. Somebody who starts to save in their 20s or early 30s and doesn’t touch their savings until they are in their 60s, will end up with a bigger amount, sometimes a much bigger one, than somebody who saves more aggressively, but doesn’t start until their late 30s or their 40s. So we would all do well to start early, wouldn’t we? Yes, but our 20s and 30s are when we are getting started in adult life, we may have a young family to take care of, we have a mortgage to pay, etc. Not to mention the recession that shrank many incomes.
As a result too many people don’t opt into the occupational pension scheme offered by their employer, and that’s a pity, because in essence they are turning down free money. Yes, it’s free money because your employer might match your contributions to a certain extent (depending on the nature of the scheme).
If you’ve ever thought of asking for a raise, an occupational pension scheme is the next best thing: it is, in effect, an organic payrise since your employer gives you more money for your work – but it’s in the form of pension scheme contributions. These schemes are also very tax effective, since you don’t have to pay tax on that organic payrise, as you would on a typical payrise that raises your income. It’s also important to mention that the default investment strategy chosen by your employer may not suit your risk profile or return objective: make sure to ask questions about both before deciding where to place your hard-earned money.
I would urge you to consider, if you have extra money and don’t need to be paying off short-term expensive debt, to funnel that extra money or at least part of it into a pension plan. While it’s still delicate, it does seem that there are embryonic signs of an upturn. And so we may be looking at increased benefits and/or wages in the future. Still, let’s not get ahead of ourselves: hope for the best, plan for the worst. Contributing to your occupational pension scheme if you have that opportunity is a very good start.
Take matters in your own hands:
Additional Voluntary Contributions
And no matter who your employer is, private or public, if you have the financial space to do so, you could tip the scales in your favour by considering AVCs, Additional Voluntary Contributions, either into your existing occupational pension or in the form of a PRSA or RAC.
A PRSA, Personal Retirement Savings Account, is available to you no matter your circumstances – it’s “personal”. You can start one of your own accord, and your employer is legally obligated to offer you the option to invest in one if they don’t offer an occupational pension scheme after six months in the workplace. It’s “portable”: as it’s not tied to who employs you, it will follow you from company to company and between employment periods. It’s also flexible: you can adjust contributions or stop them for a period of time if need be. And of course it’s ideal for self-employed people.
An RAC (Retirement Annuity Contract) is a broadly similar instrument which offers a wider range of investment options. PRSAs have limits on the charges that can be levied, while RACs have no maximum charges. And while you can have a PRSA if you have no taxable earnings, that’s not possible with an RAC.
You have many, many options and it’s crucial that you take matters into your own hands. It’s important to proactively look up information from reliable sources, like citizensinformation.ie, pensionsboard.ie, welfare.ie, consumerhelp.ie/pensions (and cspensions.gov.ie if relevant).
Exploring these sites should amount to roughly half an hour to an hour of concentrated reading: not exactly a huge insurmountable obstacle, especially as it could give you the keys to comfort and peace of mind later in life. Then go talk to advisers and review your options accordingly. Wouldn’t you give up the equivalent of roughly one day in your life, to ensure years and years of a happy retirement? I know I would!
Are you on the list?