Sunday 25 September 2016

How should I fill the income gap between retiring at 65 and getting the State pension at 66?

Jerry Moriarty

Published 21/06/2015 | 02:30

There are numerous reasons why should have a pension plan — namely you don’t want life to stop in your 60s!
There are numerous reasons why should have a pension plan — namely you don’t want life to stop in your 60s!

I am due to retire later this year as I will be 65. I have just found out I won't get my State pension until 66. I will have a pension from my employer but I was expecting also to have €230 a week from the State pension. Is there any way I can make up this gap or can I just continue to work until it is paid when I am 66? Edward, Clonakilty, Cork.

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The Government changed the retirement age for the State pension and it has been 66 since the beginning of last year. It will go to 67 in 2021 and 68 in 2028.

You will be able to claim unemployment benefit for the year between 65 and 66, although many people find this a very unsatisfactory experience.

Last year, we undertook a survey of pension trustees to assess the impact of this change and to gain an insight into how employers are planning to react to the change in retirement age. We found that for the majority of employers who are not planning to change their normal retirement, those employees retiring at 65 will have a number of options:

  •  8.8pc of trustees said they may offer members the opportunity to work past normal retirement age (a late retirement in effect)
  •  A further 5.9pc of employers said they will let their employees retire at 65 and hire them back on a fixed-term contract
  •  1.5pc of employers (with defined benefit schemes) were considering a bridging pension - effectively an extra cost borne by the pension scheme

Your employer might be open to allowing you to continue working but they are not obliged to do so. Some employers are taking a flexible approach on this on a case-by-case basis. The first thing you should do is talk to your employer.

Now that I've been made permanent in my job, I've been asked to join the defined contribution pension scheme. If I put in 5pc of my salary, the company will match it, but some of my colleagues have declined based on the money people have lost on pensions. What's your advice?

Catriona, Claregalway, Galway.

I'm always surprised that people would decline such a great deal. If you're paying tax at the higher rate, then someone else (your employer and the taxman) will contribute about €3 for every €1 you put in. By not becoming a member, you are essentially passing up this money. Sure, you can't access it until your later years - but you'll definitely appreciate and need it when you do come to retirement. And it will almost certainly have grown substantially over the years.

As for pension funds losing money; fund values do go up and down, and the media tends to focus on the downs, hence the negativity. Overall, typical pension funds have performed strongly measured over 5, 10 or even 20 years.

Most pension schemes also automatically move your money into "safer" investments as you approach retirement to ensure you are less impacted by stock market falls.

Obviously, you need to look at whether or not you can reasonably afford to save for retirement now. If you find that you can still meet all your necessary household expenditures then I would strongly advise you consider your employer's offer.

There are numerous reasons why should have a pension plan - namely you don't want life to stop in your 60s! Look at people you know in their 60s and you will realise that these people are still very much in the midst of what life has to offer. You will want to be too.

I don't know anyone who doesn't want to enjoy a comfortable leisurely retirement. But to do this you need to put the financial structures in place early on.

In addition, we are all living longer which is great! Half of all men aged 44 today will live to age 86 and women to age 87. One-third of those men will live to age 91 and women to age 93. That is a long time to ensure you have adequate income.

While it's true that the State does provide some funding for those in retirement - you should note that the State pension is designed only to be sufficient to keep you out of poverty. To look at it another way: could you live on €230 a week now? Even without mortgage and other debt you may hope to have cleared by the time you retire, €230 will not get you very far.

As evidenced by the response of some of your work colleagues, there are a variety of challenges people face when it comes to pensions, but with a little foresight and compromise, these challenges are surmountable.

One issue is the fact that the benefit of having a pension is felt so far in the future - often younger people just don't want to engage. However, what people don't realise is that the monetary benefits of pension saving in your 20s and early 30s far outweigh the value of 30 years of pension saving in your late 30s, 40s and 50s altogether.

If a person only saved for their pension for 10 years from 25 to 35, and then left the fund to grow with no additional contribution to age 65, the benefit would be greater at 65 than if they had saved for 30 years from 35 to 65.

Email your questions to jcradden@independent.ie or write to 'Your Questions, The Sunday Independent Business Section, 27-32 Talbot Street, Dublin 1'.

While we will endeavour to place your questions with the most appropriate expert to answer your query, this column is a reader service and is not intended to replace professional advice.

Jerry Moriarty is chief executive of the Irish Association of Pension Funds

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