Pension provision is a decision investors need to get right

Providing a pension and security in retirement is one of the key wealth-management decisions investors need to get right. In the past, when defined benefit pension schemes were the norm, employees could take a passive approach to their pension, knowing more or less what they would be entitled to in retirement, often defined as a percentage of their final salary. Not anymore.

As the era of the defined benefit pension scheme draws to a close, people need to gain a better understanding of pensions and to keep track of changing regulations. For example, recent changes to the rules of pension schemes, requiring higher levels of solvency, have resulted in a significant number of schemes deciding to call it a day and wind up, with more likely to follow. In addition, the Government has moved to acknowledge the increasingly high cost of funding retirement by raising the age at which people qualify for a state pension – from 65 to 68 in 2028.

Tax benefits

“The news flow on pensions has been very negative lately but for most, pensions still provide an excellent-value long-term savings vehicle with significant tax benefits. Most employers will go beyond their legal requirements in terms of their contributions as well,” notes Munro O’ Dwyer of PwC.

In this new era, individuals need to be proactive and educate themselves on the status and projected benefits of their retirement funds. Thankfully, pension providers have responded by offering online access to fund and projection tools and other apps.

The long-term nature of pension investment means that lifestyle profiling plays a key part in pension planning. In general, this means taking an aggressive approach within a pension fund in the early decades with a weighting towards higher-risk equities. Volatility in the performance of equity markets is likely to be smoothed over to achieve a balanced but overall strong return. As individuals move towards retirement, this weighting is skewed towards lower-risk investments such as short-maturing bonds and cash deposits, with the aim of locking in gains made in earlier years.

Pensions are becoming increasingly flexible and approaching retirement, investors should consider their options in terms of lump sums, the purchase of annuities and Approved Retirement Funds.

Decisions here will depend on an individual’s personal circumstances.

For example, someone considering spending a considerable part of their retirement time abroad may wish to access a tax-free lump sum to purchase a foreign holiday home. The cost of living can be considerably cheaper in countries such as Spain and the south of France where a relatively modest pension in addition to the Irish state pension could provide a good lifestyle.

With people living longer, generating a sufficient pot for retirement is an increased challenge. Aside from equities, property is an asset class that should also be considered. Paddy Swan of brokers Invesco has noticed an increase in interest in Irish commercial property. Given a 68 per cent high to low swing in the value of property, yields are now very attractive, touching 10 per cent in some cases.

Investment in funds can either be made on a single contribution basis for as little as €5,000 upwards or incrementally through a pension vehicle.

Policy review

Aging brings its own challenges and increased risks, especially when it comes to health.

As well as pension funding, individuals also need to plan for healthcare expenses and income protection, Swan notes.

“These policies need to be reviewed on a regular basis to see if they are fit for purpose. Are the risks covered appropriately, has account been taken of changes in salary for example, and do they represent the best value available in the market, are all questions that need answers.”