Will you still need me, will you still feed me, when I’m . . . 68?
Take a risk now and give your cash time to grow long before you retire
"The principle of starting early is well recognised as it takes time to build a substantial fund," says David Malone of the Pensions Board.
Workers who have no occupational or private pension scheme and who plan to retire at the traditional age of 65 could face a major shock to their system. By international standards, Ireland’s state pension is a relatively generous €230 a week. However, what many workers have not planned for is the fact that from 2028, they will only be able to draw that state pension from the age of 68.
“Despite changes in terms of levies and some reductions in reliefs, a pension is still the most tax efficient way of providing for your retirement.”
On a positive note, despite concerns within the industry, tax relief on pension contributions has been retained at the marginal rate of income tax – 41 per cent for higher earners – and generous tax-free lump sums of up to €200,000 can be taken on retirement.
Funding that pension is an expensive business, however. For example, a person with an income of €60,000 who wants to earn half of that in retirement – excluding the state pension – would need a pension fund of about €700,000 or more in today’s terms. They are unlikely to make up those numbers with contributions of less than 10 per cent of their income.
Pensions calculators, such as those at the Pensions Board website (pensionsboard.ie) as well as those provided online by a variety of financial institutions, provide sobering reading in terms of the likely shortfalls many people will experience based on their current contributions.
David Malone of the Pensions Board agrees that many people underestimate the very expensive cost of funding a pension scheme. “The principle of starting early is well recognised as it takes time to build a substantial fund. However, it is also worth noting that you can contribute a higher percentage of your salary, the older you become. From age 60, you can contribute up to 40 per cent of your salary into a scheme. In theory, you are likely to have higher disposable income at that stage in your life cycle.”
Malone’s advice is to look at your needs and to assess your assets, including likely inheritances, for example, to get an overall picture of where you will be financially at retirement age.
Age is the crucial issue. Experts agree that the long-term nature of a pension scheme provides opportunities for different strategies for different age groups.
“As a rule of thumb, the younger the you are, the greater potential exposure to risk that you can afford to take as you will have time to smooth out volatility in the market,” says “Money Doctor” John Lowe. He says there has been a 147 per cent bull run increase in equity markets since the last correction.
Conventional wisdom suggest that, as investors get closer to retirement, they need to take a more cautious approach, locking in returns they have made in equity markets and putting money into safer assets, including deposits.
However, with deposit rates having shrunk over the past 12 months, returns here are now paltry. A typical 12-month deposit rate now offered by one of the banks at 1.9 per cent for example will effectively result in virtually no return when Dirt and inflation are taken into account, Lowe says. Even mature investors are not content with this it seems. He cites examples of clients of his in their late 70s who are willing to take a punt on 20 per cent of their investment pot in a managed fund, exposing themselves to both the upside and downside risk of equities.
Fionan O’Sullivan of IFG says that in pensions, age profiling is vital and that internationally-accepted asset modelling is used to allocate investment funds between developed and emerging market equities, long bonds, index-linked bonds and cash. Increasingly, decisions are made on the age and risk appetite of the investor.
“Even a cautious investment based on a very low risk appetite will have a very strong equity component through most of its cycle as you simply will not get the returns that you need without it. It is only at 10 years out from retirement that you would typically look to de-risk from equity exposure,” he says.