No time to waste, the pensions time bomb is ticking
So how much is enough? The National Pension Policy Initiative in 1998 suggested that adequate gross retirement income would be 50 per cent of gross pre-retirement income, a figure which includes the State pension. So if you earn €80,000 you need a pension income of €40,000. If €12,000 comes from the State you only need to find €28,000.
Only! To reach that magic number you will need a fund of between €700,000 and €930,000. A 35-year-old would need to put aside €1000 every month for the rest of their working life to get to there. There are not many people managing that. Don’t be put off though and remember that if you can’t afford to save as much as you’d like or need, save as much as you can. Your fortunes may well improve into the future and we have to hope that today’s austerity cannot last forever.
WHAT ABOUT THE TAX BENEFITS?
At present there is still 41 per cent income tax relief on pension savings although the Government has their eye on it.
Common sense would suggest they keep their hands off it. Income tax relief is absolutely essential in helping anyone save the nest egg needed for a decent retirement.
Approximately 650,000 people pay 41 per cent income tax once they earn €32,800 or more per annum according to Milliman, actuarial consultants.
If you are a higher rate taxpayer and save €100 into your pension – it goes straight into your savings, saving you 41 per cent income tax on this contribution. In other words, it costs you €59 to save €100.
To put it another way, with tax relief as it stands people can ask themselves: Will I save €100 into my pension or receive €59 into my hand after the taxman takes his cut? Will I save €200 into my pension or receive €118 after tax into my hand? And so on.
This relief makes up 41 per cent of your savings into your pension and is a must-have for ordinary private savers to reach their pension pot goals.
Without this relief it would be very difficult to save enough money.
DOES MY COMPANY HAVE A PENSION SCHEME?
It almost certainly does but it is alarming how many people do not join. It is even more alarming how many Irish companies – well known names that make a lot of money – give their employees little encouragement to do so.
A good employer will pay between 5 and 10 per cent of an employee’s annual salary into a company pension scheme.
If your company has a decent occupational pension scheme and you earn €40,000 per year, the company will be putting between €2,000 and €4,000 into your pension pot every year.
This is a serious benefit in austere times. Typically, you will have to match this contribution. Remember that tax relief of 41 per cent applies to those paying the higher rate while there is 20 per cent relief if you are a standard rate taxpayer.
SHOULD I BOTHER WITH AVCS?
Absolutely. Additional Voluntary Contributions are a turbo-charged way to get your pension moving.
Apart from anything else a pension top-up allows you to watch compound interest work in a very pleasing way.
You put in a hundred quid which is worth €110 in a year and then €121 a year later all the way up to retirement.
Very few people seem to understand how important and tax efficient a boost AVCs are to pension savings.
Industry sources say the take-up on AVCs is generally low.
The most important thing to know is they are simply another clever way to save money in addition to your main pension scheme contributions.
If you saved an extra €200 per month in AVCs, your extra fund would grow to €162,000 after 30 years. This money is in addition to your main scheme – we are assuming growth of 6 per cent per year and a 1 per cent annual management charge.
By any measure that is a lot of cash to have when you retire.
HOW MUCH EXTRA CAN YOU SAVE INTO YOUR PENSION AS A PERCENTAGE OF EARNINGS?
If you are under 30 you can put 12 per cent of your earnings into your pension and benefit from the tax relief.
Between 30 and 39, you can put in 20 per cent which rises to 25 per cent up to the age of 49 and up by another 5 per cent between the ages of 50 and 54 and by the same amount again when you are aged between 55 and 59. Anyone aged between 60 and 75 can put 40 per cent of earnings into their pension fund.
BUT PENSION PERFORMANCES ARE DREADFUL, CHARGES ARE TOO HIGH. WHY SHOULD I BOTHER?
The most recent 10-year annualised average managed pension fund performances have been poor compared with previous decades – we can thank the good people at Lehman Brothers and the ongoing financial crisis at home and abroad for that.
However bad and all as pension funds are doing, they have still beaten inflation with rates of return of almost 4 per cent per annum compared with an inflation rate of 1 per cent.
And the long term performances are still impressive at around 9.5 per cent annualised over 30 years to the end of last month. Had you saved €200 a year or €72,000 over the past 30 years in an average pension managed fund you would have a fund of around €300,000 today which is okay. And some investments are doing better than others.