Take refuge: what you need to know about pensions

Pensions may not be sexy or cool but they are important. According to a survey published by Deloitte just before Christmas, more than half of Irish working adults don’t have a pension, and many of those who do aren’t paying it enough attention. If you are in that category, then maybe we can help.

Why do I need a pension? Don’t my taxes and PRSI pay for my State one?

All things being equal, someone without a private pension can rely on the State when retirement comes. The State pension is now €230.30 per week. But if you’d like to spend your golden years taking round- the-world trips and doing other fun things you had put off earlier in life because of work and family commitments, then you will need more than that.

How much more?

That depends on what you read. Although it is nearly 20 years old, the National Pension Policy Initiative of 1998 is still a good guide. It suggested an “adequate” gross retirement income of 50 per cent of gross pre-retirement income.

So if you earn €80,000 on the day you retire, you need a pension income of €40,000. If €12,000 a year comes from the State, you need €28,000. To reach that magic number, you will need a fund of between €700,000 and €930,000.

Sounds like a lot.

Oh, it is. If you wanted to have a retirement income (including the State pension) of €30,000, you will need an annual private pension of €18,000. For that you will need a fund of €350,000.

We asked the number crunchers at Standard Life to work out how much we would need to put aside to get to that figure by 65. Someone who starts a pension at 25 will need to save €238 every month. A person who starts 10 years later will have to find €432, while someone who puts off their pension until 45 will need to put €864 into their pot every month for 20 years to get to that number (which is based on 6 per cent growth per year).

So there’s a big difference between starting at 25 and 45?

Yep, every 10 years that you delay starting saving means you double the cost of how much you need to put away to get to the same place when you’re 65.

Well, that’s not good. There are tax breaks, though?

Yes. Pension tax relief is 40 per cent and is probably the best tax break available to the “squeezed middle” right now.

"Why would you give the taxman 40 per cent of your pay packet if you could save it into your pension nest egg instead?" asks Jim Connolly, head of pensions at Standard Life. "Given the squeeze on middle- income families with property taxes and imminent water charges, it is nice to get something back from the Government."

It is indeed. And we still have the State pension, right?

We do. But it's not something you should bet the farm on. At present, there are more than 420,000 Irish people over 65. When the last of the Auld Lang Synes are sung on new year's eve in 2049 (or downloaded into our brains by robots or whatever we will be doing then), there will be almost two million retirees.

The State will struggle to pay pensions for all these people, not least because the proportions working and retired will have shifted. Five years ago there were six working people for each retired person. In 2050 there will be only two working people for every retiree.

Should I join my company scheme?

Absolutely. A good employer will pay between 5 and 10 per cent of your annual salary into a pension scheme. If your company has a decent scheme and you earn €40,000 per year, the company will put between €2,000 and €4,000 into your pension pot every year. You will have to match at least some of this contribution.

This takes us back to tax relief. The rate of 40 per cent applies to those paying the higher rate, while there is 20 per cent relief if you are a standard rate taxpayer. So putting in €100 a month costs you only €60.

Pensions have performed badly. Would I not be better off saving?

No. Pensions have peaks and troughs but, looking at the big picture, they are still better for securing your future. The average managed fund over the past 30 years has returned about 9 per cent per year. The best post office tax-free returns offer 5 per cent per year.

What about pension charges?

Charges occur at various stages: when a pension plan is set up, during the contribution phase, and when a member exits from a plan. The charges can be borne by either the employer or the member. Anyone making a pension move or decision should consider the effect of charges.

A report on pension charges by the Department of Social Protection has found that disclosed charges vary from 0.9 per cent to 3.08 per cent across the types of pensions it considered. The impact of charges at those levels on your final fund is between 5 per cent and 28 per cent.

Having said that, there are other factors to consider when choosing a pension, including the quality of the provider and its ability to administer your contract effectively.

Can I do it all on my own?

Yes and no. But mostly no. Good professional advice is one of the best investments you can make. A broker you can trust will make all the difference in the world. Ask your friends and colleagues, get word-of- mouth recommendations, do whatever it takes to get the best pension advice you can. It is, after all, one of the most important financial decisions you will ever make.

What companies should I consider? 

It seems obvious, but always go for providers who have a good record and are financially strong. Some providers, especially insurance companies, have been offering pensions for

many years and are backed by huge financial resources. FTSE 100 companies include Aviva, Standard Life and Zurich. Irish Life is a closer-to-home option.

How much do I need to put in?

Pension products offering wider investment options are more accessible than ever. You can put in as little as €25 per month to start building a portfolio. Not everyone is comfortable choosing risk-appropriate investments for themselves. Other people can do the tweaking of your portfolio for you. One such example is Standard Life’s Myfolio, which gives ordinary investors access to actively managed funds.

What about topping up my pension?

Additional voluntary contributions (AVCs) are most useful for those behind in their retirement saving or uncertain about the future value of their final salary pension scheme.

If you are starting out and have no serious drains on your finances other than night clubs and fancy shoes, put a few bob into AVCs. They will grow your pension pot fast and give you greater control and independence from pension shocks.