Ten ways to boost your personal pension pot
Maximising your retirement income is an important business so no opportunity should be ignored, writes CAROLINE MADDEN
1 BUMP UP YOUR CONTRIBUTIONS – BUT ONLY IF YOU CAN AFFORD IT
The single biggest factor in determining how much you’ll have to live on in retirement is the amount you contribute to your pension pot. And due to the power of compounding – which is essentially growth on growth – the earlier you start paying into a pension, the better.
However, before you commit every last cent to your pension, it’s important to step back and make sure it’s the right choice. Munro O’Dwyer, pensions director at PricewaterhouseCooper, points out that it makes little sense to maximise your pension contributions if doing so means you’re not paying off your 15 per cent APR credit card bill, or it puts you at risk of missing loan repayments which can damage your credit record and create a financial cost in the future. So it’s important to achieve a level of balance between providing for the future and surviving in the present.
2 PUT THOUGHT INTO THE ASSET-SPLIT
Gary Connolly of iCubed investment consultancy says one of the key decisions that will determine the performance of your pension portfolio is the asset allocation, ie how your pension assets are split between equities, bonds, cash and various other asset classes.
When an employee join an occupational pension scheme they’re generally given a choice between low, medium and high-risk funds, and what you choose on that first day could have a significant effect years down the line. If you don’t tick any box, you’ll most likely be put into a default fund, which may not reflect your preferences or attitudes to risk, so it’s worth making an effort to understand the different investment choices available to you.
So how to decide? Connolly says the rule of thumb is that the longer you have to retirement, the more risk you can take. “If you’re 25 with 35 years to retirement... you can afford to take as much risk as there is available to you, as it’s such a long time period and there’s very little in your fund. However, somebody in their late 40s or early 50s with a large amount in their pension relative to what they’re putting in, then that’s a different situation and they need to take cognisance of what their expectations are for their income in retirement.”
3 QUIZ YOUR FINANCIAL ADVISER
According to Pensions Ombudsman Paul Kenny, charges can vary considerably from one pension contract to another, so the first thing people need to be aware of is what they are paying their financial adviser and how that is paid.
Essentially, if your financial adviser is being paid a large commission from the insurance company, then the charges built into your pension contract are likely to be greater.
“And that could come out in a hidden sort of way,” says Mr Kenny. For example in some old contracts, only a percentage (in some cases as low as 45 per cent) of the individual’s money was invested into their pension in the first few years.
The alternative to the commission basis is to pay an upfront fee to your adviser, which is more transparent in many cases.
4 MAKE SURE YOUR LIFE ASSURANCE ISN’T HURTING YOUR PENSION
Many people set up pensions with life assurance living alongside it. However, what the insurance company may not tell you is that the cost of this life cover is going to increase as you get older, so that less of your monthly contribution will be going towards your pension savings, and more will be going to support the life cover.
If you buy an ordinary stand-alone life policy, you’ll be sold a level annual premium product, which means you pay the same premium throughout the term of your policy. However, life cover connected with pension schemes is often written on a recurring single premium basis, which means it varies according to age.
“You come to the point where the cost of life cover could exceed your premium and start eating into your fund,” says Mr Kenny. There are steps you can take to soften this effect, but if you separate the two products you may well be better off.
5 MAKE SURE TO CLAIM ANY FOREIGN SERVICE ENTITLEMENTS
Ireland has bilateral treaties with many countries (for example all European countries, the US, Canada, New Zealand and Australia), which means that if you made social insurance-type contributions in those countries, they may be counted for eligibility for the State pension here. Indeed those foreign contributions may make the difference between being eligible for an Irish pension and not being eligible. The Department of Social Protection will liaise with other countries on your behalf to sort out your entitlements.
6 BUY BACK NOTIONAL YEARS
If you wish to bump up your pension pot, then one way of doing so is through additional voluntary contributions. However women who work in the public service, and who had an interrupted career (perhaps leaving the workforce to bring up a family), also have the option of buying back years of service missed so as to receive a full service pension upon reaching retirement age.
While this strategy of buying back notional years can be a valuable one, Mr Kenny says one of the problems with it is that people are not always told they will be liable for spouse and children contributions as well as their basic contributions, so they can arrive at retirement with a “big chunk taken out of their lump sum”, so it’s important to check that.
7 PAY BACK MARRIAGE BAR GRATUITY
Women who were forced to leave civil or public service employment upon marriage very often received a marriage gratuity. Essentially this payment represented compensation for lost pension entitlements.
If a woman subsequently returned to her job she had the right to repay the gratuity, with interest, and in return she would be given back her pension entitlements. For those women who haven’t paid back their gratuity, it’s important to consider it because even with the hefty interest that would be due, it could be very much worth their while.
8 ANNUITIES V ARFS
Munro O’Dwyer says that when weighing up annuities against Approved Retirement Funds, start from the premise that neither one offers more value than the other. “With the annuity option you get the certainty of that cheque in the post for as long as you so shall live,” he says. With an ARF you get to keep managing your pool of pension assets, with the potential to continue making investment returns.
Annuities guarantee a set income for life, but at the moment they’re expensive because of the low interest rate environment. Also, the annuity contract ceases when you die, which means nothing will be left to your spouse. By contrast, the balance of an ARF would be passed on to your estate on death.
“Depending on how long you live and the investment return your ARF achieves, one will look better than the other, but you can’t know in advance,” says O’Dwyer.
9 SHOP AROUND ON ANNUITIES
If you’re buying an annuity, don’t forget that you’re not stuck with your own pension provider. There are a number of providers on the market, and it’s worth shopping around as some will be more competitive than others, particularly for women.
Also remember to check what policy charge the annuity provider is going to apply – it’s generally a small flat fee to cover administration costs, but it can vary between insurance companies so you may be able to save money by comparing charges.
10 PUBLIC SECTOR WORKERS SHOULD PAY FOR GOOD ADVICE
Mr Kenny advises public sector workers approaching retirement to pay for decent advice on their pension entitlements from a financial adviser who knows the ropes, and is familiar with all the quirks, gaps and perils in the system. “We’ve got into this mode of thinking that all public sector workers have got great pensions. A lot of them have, there’s no question about it, but the detail in the schemes contains a lot of funny stuff, and if you don’t know it’s there and how to deal with it, it can be awkward.”
He says that unless you’ve been in the same public sector job for your whole career, with no transferred service, then it’s worthwhile getting an experienced adviser to check out your pension entitlements.
“Most people really don’t have the expertise,” he concluded.