Family and finance: An expert on how the heck you should be saving for your pension
Worrying over money and finance is something a lot of us do, causing stress, tension and often, unfortunately, arguments.
This is the fourth and final article in our must-read series on personal finance with money expert Paul Merriman of askpaul.ie and this week, he is tackling a subject that most of us try to avoid thinking about — how to financially support ourselves in old age.
With decades of experience in the pensions market, Paul is well placed to advise you on the best way to plan for your family’s financial future.
And so without further ado – here is everything you need to know about the P word ....
Our dangerous pension deficit
Data from Irish Life suggests that 90 percent of people in Ireland are not saving enough for an adequate pension.
In fact – about 65 percent of Ireland’s private sector workforce has ZERO private pensions savings. In effect, this means one third of us will rely primarily on the State pension after retirement.
However, this will result in a massive reduction in most people’s income — the basic (non-contributory) pension is just €12,064 per year, or €237 a week.
For those who wish to live out their final years in financial comfort, the State pension, whilst it provides a tiny buffer, it just isn’t going to be enough.
The age at which you can claim the pension is also being pushed back. At present, the age is 66 for those retiring today.
From 2021, you will not be eligible for the State pension until you turn 67 while from 2028, you will need to be 68 to qualify.
How auto-enrollment will work
The Government has (belatedly) accepted that Ireland is a ticking demographic time bomb — with the number of pensioners here predicted to more than double in the next 40 years while the ratio of workers to pensioners will collapse from the current level of 5:1 down to just 2:1.
This is why an auto-enrolment scheme is being introduced in Ireland from 2022. It means employees will automatically be opted-in to a pension plan (from the age of 23, according to early proposals).
Employee savings in the scheme will be supported by employer and State contributions. It is envisaged the level of contributions will be set at 1 percent of salary for employees with matching contributions from employers and the Government adding €1 for every €3 contributed by the employee.
This will eventually rise to 6 percent in 2028, with the employer matching the employee contribution and the Government adding a further 2 percent.
So we are looking at almost a decade before the scheme is fully up and running. That will be too little, too late for most of you reading this article.
That is why enrolling in a pension scheme right now should be a key priority.
Merriman points out that one of the big bonuses of making pension contributions is the huge tax relief you enjoy at the marginal tax rate.
“Pensions are basically a tax haven,” he explains. “Not only do you get tax relief on your contributions, but you also enjoy tax-free growth on the investment for as long as you pay in to a scheme.
“For example, if you are in the 40 percent tax bracket and pay in €100 every month, you get €40 back, so in effect, your pension is only costing you €60 a month.
“That’s a brilliant return in itself — and that is before you invest a cent. Pension funds should continue to grow throughout your working life (although there will be ups and downs along the way) and you will not pay any tax on that growth.”
Pensions made easy
If you work in a firm with an occupational pension scheme, then sign up to it as soon as you can, urges Paul. “Not only are you cutting your tax bill, but your employer is also contributing towards your pension fund so it’s a win-win situation.”
For those of you reading this article who are self-employed or PAYE workers with no pension scheme, then your options include starting a Pension Retirement Savings Account (PRSA) or a Personal Pension Plan (PPP).
A financial advisor can explain the best options for your circumstances and remember to ask about fees and charges. Some advisors deduct an “allocation charge” when you enter a scheme (we don’t do this at askpaul.ie so shop around) and this can be as high as 5 percent. That’s 5% of your money gone straight away.
Annual management charges are generally applied as a percentage of the assets of the fund, for example 1% of fund assets per annum. Some funds also have exit penalties too.
Seek expert advice before signing on the dotted line.
It’s amazing the number of people who pay into an occupational scheme, change jobs, join a new pension and then forget all about the contributions they made to their earlier pension.
Are you one of them? Then Paul Merriman has news for you — a big pile of cash might await.
How? You can take back control of this old pension (through a buyout bond), reinvest it and then draw down a lump sum any time from the age of 50.
Paul reveals: “I’ve had many clients who did not realise they could do this. Whether it’s paying off a mortgage or buying a new car, we could all do with a lump sum in our 50s!”
Perhaps you spent time working in the UK and have a British pension. “People are worried about Brexit and the fall in Sterling,” says Paul. "You can transfer this back to the Irish market and make it work for you."
Ask a financial advisor to help you with the process.
For more tips and information, check out www.askpaul.ie/financial-planning/ and get a free personal budget template and advice in easy to follow steps so you can create your own personal financial plan.