Reality bites with online pensions calculator

How much money will you need to survive in and enjoy your retirement?

The Pensions Board, the statutory body responsible for advising the Government on pensions policy, is hoping that a new online pensions calculator will shock "happily ignorant" pension scheme members into boosting their pension contributions, thus ensuring a comfortable retirement, free of financial crises.

For a lot of younger people, there is no meaningful way to answer the question of how much constitutes an "adequate" retirement income. Even if they pluck an annual figure in "today's money" out of the air, they have little way of knowing if that will be enough to satisfy their needs decades down the line.

Many young workers assume that as they get older they will become richer, either because they will be earning spectacularly more or because they will be blessed with magic budgeting skills that allow them to painlessly amass a nest egg that, with a spot of canny investing, they can transform into a retirement income bonanza.

But if you haven't got various properties dotted all over the place that can be sold off when you do reach the point of wanting to give up the day job, then you may end up wishing that you had paid closer attention to the finer details of your pension scheme.

One in two workers in the Republic belong to an occupational scheme, which means they won't be solely dependent on State old-age pensions by the time they reach their late 60s.

But, even if you belong to the 50 per cent that is seeing a chunk of their salary disappear from their payslip and into a pension fund every month, it is perhaps best not to break open the champagne just yet.

The first crucial step in finding out what kind of retirement income your pension is likely to generate is to ascertain whether your employer's pension scheme is a "defined-benefit" or "defined-contribution" scheme.

If the answer is "defined benefit", congratulations, because you are one of about 480,000 people whose pension is guaranteed by their employer to be worth a proportion of their final salary for each year of service.

It might be worth checking out what exactly this proportion is - for example, 1/60th or 1/80th. The lower the proportion, or the shorter your service, the more worthwhile it will be to chuck a few additional voluntary contributions (AVCs) into the pot, especially as you get older and the tax relief available on pensions contributions becomes increasingly generous.

The main worry with defined-benefit schemes, however, is that your employer might go bust at a time when its pension scheme is underfunded.

But one in three members of occupational pension schemes - some 240,000 people - belong to defined-contribution schemes, where there are no guarantees.

Instead, the size of their pension will depend largely on the returns their contributions can garner on the stock market.

There is no way of knowing exactly how much this will be, making it difficult for defined-contribution scheme members to properly plan ahead. Typically, you may be contributing 5 per cent of your salary, while your employer chips in another 5 per cent.

This contribution might sound healthy, until you consider that employers operating defined-benefit schemes often invest more than three times the amount invested by employers running defined-contribution schemes in order to cover the cost of their pension promises.

To generate an adequate pension, the combined percentage of salary that employers and employees are putting in should be "a lot closer to 20 per cent", according to Ms Anne Maher, Pensions Board chief executive.

Pensions are more expensive now than they ever were because we are all living longer.

The longevity statistics push up the cost of buying an annuity, which is the monthly guaranteed-for-life pension sum that is purchased at retirement using the pension investment fund.

The impact on pensions of our newly extended life expectancy "cannot be exaggerated", Ms Maher believes.

The Irish Association of Pension Funds (IAPF) has also warned that defined-contribution scheme members should double their monthly retirement savings, encouraging them to check out pensions projection tools from their financial advisers.

The Pensions Board's new online calculator is one such projection tool and is useful for employees who have just been given access to their employer's defined-contribution scheme, as well as people taking out Personal Retirement Savings Accounts (PRSAs) or other personal pensions.

The calculator gives an estimate of how much a person should be contributing on an annual basis depending on their age, gender and current salary to get the pension they want at the age of 65 - assuming that the person has not already made any pension provision.

For example, a male aged 35 with a current salary of €50,000 is about to join a pension scheme. He would like to receive a pension that is worth two-thirds (66 per cent) of his pre-retirement salary.

Click the pensions calculator into action and it will reveal that in order to get an annual retirement income of €33,000 (66 per cent of €50,000), a contribution of 24.4 per cent should be going into his pensions pot.

This amounts to an annual contribution of €12,219, or €235 a week, based on the current salary.

Because women live longer than men and are thus likely to receive their pensions for a longer period, they will need to contribute even more.

A female aged 35 earning €50,000 will need to put in €15,121 per annum or €291 a week if she wants a retirement income equivalent to two-thirds of her income.

The good news is that these contribution amounts don't include tax relief, which is available at the highest rate of tax paid by the person.

The relief, however, is limited to a percentage of a person's salary depending on their age (see table). For example, 30-somethings can contribute a maximum of 20 per cent before they will have used up their entitlement.

Scarily enough, these contributions won't help the 35-year-olds meet their target pension alone. The Pensions Board's calculator includes entitlement to a full contributory State pension in its figures, assuming that the current rate of €167.30 a week will increase in line with salary increases.

Salaries are assumed to increase at a rate of 3 per cent per annum and the pension will also increase at this rate during retirement. A 50 per cent spouses' pension on death in retirement is also included.

The investment return assumed is 5 per cent per annum, which before the plunging, historically volatile stock markets of recent years might have sounded conservative, but now seems a sensible bet.

The Pensions Board's calculator works in reverse - you put in how much you expect to get (expressed as a percentage of your pre-retirement salary) and it shows you how much you should be putting in.

The Irish Insurance Federation's online pensions calculator operates the other way around.

People worried about their under-enthusiastic attitude to saving for the future can punch in what they are actually putting or planning to put into their pension. They will then be shown exactly how much of a retirement income that will produce.

So the calculator reveals that a male starting a pension at the age of 30 who decides to put in €500 a month will be on target to receive a weekly retirement income of €361, once the State pension has been included, the spouse's pension has been paid for and the maximum 25 per cent tax-free lump sum has been taken on retirement.

The Pensions Board cautions that its calculator is designed to give a broad indication of the level of contributions required to give people their desired pension at 65.

The actual pension at retirement will depend on the actual investment return, salary inflation up to retirement and the cost of purchasing annuities at retirement.

Nevertheless, the board hopes that the calculator will act as "a wake-up call" for members of pensions schemes who would prefer not to think too much about the day when they finally receive their gold watches and good luck cards.

The Pensions Board's calculator can be accessed at www.pensionsboard.ie. The Irish Insurance Federation's calculator is at www.iif.ie.