Pensions need revamp to gain in popularity

The Irish Association of Investment Managers tells Laura Slattery that a lack of access to money before retirement is putting people off saving for a pension.

A Pensions Board advertising campaign warns workers that they can't hide from their financial future forever.

Some 48 per cent of the workforce is not saving for retirement through a pension and, as a consequence, many may be forced to rely on the State contributory pension - currently a meagre €179.30 a week.

Minister for Social and Family Affairs Séamus Brennan has described the Central Statistics Office's latest figures on private pensions coverage, which has increased 2 per cent since 2002, as disappointing and has brought forward a report by the Pensions Board from September 2006 to this summer.

So why are pensions so unpopular?

Simple lack of affordability has always been one reason why workers haven't chosen to divert their earnings into a pension plan but, according to the Irish Association of Investment Managers (IAIM), lack of access to their money before retirement is also putting people off, with the result that they are losing out on one major benefit of pension saving: tax relief.

The IAIM wants the Government to introduce what it calls a Lifetime Flexi Investment Account, whereby people would be encouraged to save for retirement through tax incentives but, every five years, would be able to withdraw up to 30 per cent of their previous five years' contributions.

The IAIM's proposal is based on the premise that younger workers don't know what they are going to be doing next year, never mind 30 or 40 years down the line and, therefore, don't want to commit to a pension.

"There is a problem with flexibility," according to IAIM secretary general Ann Fitzgerald.

"People say: 'I can't lock the money up until retirement.' But if you don't take out a pension, then you have lost out on the tax allowance available."

Fitzgerald believes that the flexible investment account proposed by IAIM would appeal to women working in the home who may have part-time jobs and want to have security in retirement.

Even if younger people can, in theory, afford to contribute to a pension, they tend to have more pressing financial priorities - everything from saving for a house deposit or paying back a mortgage to luxury goods such as iPods and a regularly updated wardrobe can get in the way of retirement saving.

But alongside the Government's difficulty in convincing more people of the merits of pensions lies the success of Special Savings Incentive Accounts (SSIAs). The IAIM attributes their success to the easy-to-understand incentive of €1 for every €4 invested and the fact that savers had access to the funds within a "tangible time horizon".

Under its proposed Lifetime Flexi Investment Account, the IAIM wants tax relief to be available at the standard rate of 20 per cent on contributions up to €3,000 per annum. For people outside the tax net, the Government would pay a 20 per cent bonus on their contributions.

SSIAs, once they mature, should be allowed to kick-start the account, subject to the annual tax relief limits on pensions, the IAIM suggests.

"What we are trying to do is incentivise people to save for the long term but not prevent access to the money," says Gary Connolly, IAIM retail funds committee chairman.

Under the IAIM's proposal, the proceeds of the account would be tax-free at retirement but earlier withdrawals would be subject to an exit tax of 23 per cent - a clear deterrent to people tempted to use their retirement savings as a piggy bank.

Under current pensions rules, people can only get a refund on their contributions to an occupational pension scheme within the first two years of membership, and only then if they are leaving their job.

Personal pensions such as Personal Retirement Savings Accounts (PRSAs) offer more flexible terms than occupational schemes, allowing people to decrease their contributions at times of financial strain or stop them altogether. But, in most circumstances, you won't be able to get back the money you have put in until you reach retirement age.

According to financial adviser Liam Ferguson, however, lack of access to the funds pre-retirement is not a major issue for people thinking about starting a pension.

"Most people accept that saving for their retirement is, by definition, a long-term process," he says.

The most common deterrents, Ferguson believes, are the perceived investment risk - ie "my father had a pension and it dropped by 20 per cent in a few days" - and a lack of access to funds post-retirement.

"For many employees, the annuity option is still the only one available and it's not particularly attractive at present," says Ferguson.

In many company schemes, the savings in the pension fund must be converted into an annuity - the pension payment posted by cheque or lodged to a retired person's account each month.

But annuity rates have fallen dramatically over recent decades, which means that the amount of annual income a person can get in exchange for their pension fund has diminished.

Self-employed personal pension holders and employees with additional voluntary contributions (AVCs) with sufficient savings in their pension fund can opt to keep them invested in an approved retirement fund instead, but again they may be put off by the investment risk, Ferguson says.

The danger that someone's retirement savings may disappear down a black hole in the stock market is a very real one to the growing number of employees who are offered entry only into a "defined-contribution" type of scheme.

Pensions are struggling in the popularity stakes because the best kind of pension schemes - the type people meant when they talked about getting "a good, pensionable job" - are proving far too expensive to run for employers' liking.

Workers are now more likely to be offered a pension where the resulting retirement income depends on fluctuating investment returns than to be included in a "defined-benefit" scheme which guarantees to give them a pension based on their final salary and years of service.

Meanwhile, the existing tax-relief incentives on pensions makes them more alluring for a taxpayer on the higher rate rather than the standard rate, notes Ferguson.

On a contribution of €100, a person who pays tax at the 42 per cent rate receives relief at that rate, plus a further 6 per cent relief from PRSI and the health levy. As a result, the pension contribution costs a net €52.

But for people paying tax at the standard rate of 20 per cent, the incentive is not as appealing: a €100 contribution will have a net cost of €74. And for those outside the tax net, the incentive melts away.

Tax credits or savings bonuses for lower-income workers, initiatives for converting SSIAs and mandatory pensions are all expected to be examined in the Pensions Board's report.

In the meantime, the 48 per cent of the Irish workforce without a pension can continue finding it all too easy to ignore the financial future, as the bill-strewn financial present and the ghosts of the financial past loom over every purchasing decision and every ATM withdrawal.