Pensions – The Final Frontier

We know that as the tax return deadline approaches, many taxpayers are considering whether they should make pension contributions to reduce their 2013 tax bill. A pension contribution remains as one of the most effective ways of reducing your income tax liability, and at the same time providing income for your retirement.

Any lump sum contributions paid before 13 November for on-line returns can be used to reduce your 2013 tax bill. This applies to contributions to personal pension plans (e.g. PRSAs, Retirement Annuity Contracts) and employment pension schemes (i.e. AVCs – Additional Voluntary Contributions).

Unfortunately there are constant background rumblings that maybe this tax relief should be reduced. We disagree with this, as the public at large need more encouragement (not less) to save for their retirement!

When it comes to pensions, the questions we’re asked most regularly are;

  • Do I need a pension?      and
  • Are pension plans the best way to plan for my old age?

Do you need a pension?

Well unfortunately none of us are getting any younger and even though retirement may seem like a distant event, steps that you take now will determine your lifestyle in your later years. At the end of the day, it’s really all about building up a war chest for when you stop working. The bigger this pot is, the better your lifestyle will be when your income stops.

Some good (and bad!) news is that we’re all now living longer than before.  Men are now living on average to age 78 and women to age 83. We can thank our healthier lifestyles, better diets and medical science for this! While this is certainly good news, it also comes with a price. If you live longer, you need a bigger nest egg to see you through these years.

Will the government look after you?

Unfortunately you can’t relay on the state if you want any more than a subsistence lifestyle.  The state (contributory) pension is currently €230.80 per week for a single person and €436.60 per week for a couple. Not a lot of money if you fancy going on the odd cruise! Also the state has already started pushing out retirement dates – for anyone born in 1961 or later, they won’t get their state pension until age 68.

On top of this, the government actually hasn’t saved any money for future pensions. So as the numbers of those working reduces in relation to the numbers of pensioners receiving benefits (as our demographics show they will), there will be less money for the government to pay out. So what can they do? Well first of all, they can increase PRSI to bring more money in to pay out in benefits. Or else they can reduce the benefits or indeed introduce means testing of state pensions. The likelihood is, it will be a combination of these sort of remedies.

The reality is that it’s up to us to look after our retirement needs if we want a nice lifestyle to enjoy.

Are Pensions the right way?

We know that pensions are a complex area and this puts a lot of people off. However working with a good independent financial adviser will help you cut through this complexity. They can help you identify the right pension structure for you to ensure that a pension plan meets your needs in later life. Pension plans today can be extremely versatile and tailored to you to ensure you maximise the benefits by;

  • Investing in assets that meet your risk appetite.
  • Investing in a wide diversity of assets to minimise any investment “shocks”.
  • Gaining tax relief (still at the marginal rate!) on your contributions.
  • Seeing your pension fund grow, free of any taxes.
  • Availing of a tax-free lump sum of part of your fund at retirement.

Unfortunately many people in Ireland have learnt a bitter lesson about investing in a single asset (in many cases property) and pension funds are a great way to maximise your retirement income.

What do you do next?

Well it’s probably quite obvious but the longer that you pay into a pension fund, the more you can expect to receive when you retire and the more likely you are to achieve your financial goals. So don’t delay.

Also, be realistic about how much it will take to achieve your goals. As a rough rule of thumb, you should aim to save “half your age”. So if you’re 36 like me 😉 you should aim to save 18% of your income to build up a decent fund. Of course, this is only a rough calculation. A good independent adviser will help you develop a far more tailored picture for you, taking account of any existing benefits that you’ve already built up and will help you to implement a plan that is right for your particular circumstances.

And really this last point is the key to it all. Helping people to develop tailored solutions to address your retirement needs is meat and drink to independent financial advisers such as us. Talking to someone who is independent is crucial. Independent financial advisers devise solutions and recommend products that best meet your needs as we have access to all the products in the market. Unlike a bank or a direct seller, we are not forced down the route of recommending a particular product of one institution.

So in summary, you’re hopefully going to be retired for a very long time. How well you can enjoy this is up to you, as you can’t rely on the state. Remember all the benefits of pension plans. Oh, and make sure you get independent advice.

If you have any comments, please feel free to leave them below.