Is there any real point in saving for pension?
Charlie Weston on options open to long-term savers
Published 27/10/2011 | 05:00
No, a cynic would say. Most company pension schemes are in trouble, money invested in pensions has made little or no return and the Government is threatening to radically reduce the tax reliefs for those saving for retirement.
But the cynic would also have to agree that there is no getting away from the fact that people in work need a basic source of income in retirement.
Few of us would be content to live on the state pension, which is just €230.30 a week for a single person. Over a year, that works out at €12,000. So someone earning €60,000 at retirement would be facing a drop in income of 80pc once they retire.
Unless you are prepared to accept a massive drop in income in retirement you need to put money aside for the day you give up working and a pension is still the best way to do that.
Tax reliefs under threat
The last budget saw some of the tax reliefs for investing in a pension reduced from this tax year on.
No longer can you claim relief on PRSI (pay related social insurance) and the income levy (not the universal social charge). But you can still claim those for last year if you are making a tax return in the next few weeks for 2010 (see later in this article).
But, for now, those on the higher rate of income tax can still get tax relief at 41pc when they put money into a pension, subject to limits. This means that every €100 put into a pension costs €59, as the taxman provides relief at 41pc.
Will the reliefs be slashed?
The Government has signed up, as part of the bailout deal, to further reduce the tax reliefs on pension investments.
The plan is to gradually reduce the relief that can be claimed against income tax from 41pc to 34pc next year. The year after, it would fall to 27pc, before hitting 20pc for all in 2014.
However, there are some indications lately that the Government may row back on this. Social Protection Minister Joan Burton is reviewing the issue.
There is a strong feeling that the pension savers have already given quite a lot when one considers the changes in reliefs in the last budget and the impact of the pensions levy on private sector schemes.
Standard Life's head of marketing Brendan Barr is one of those who feels the tax relief will not be cut "if the Government adopts a prudent 'balancing act'."
Ms Burton, and others in Government, have repeatedly mentioned that there will be a further reduction in the size of the pension pot you can build up.
Having been reduced again in the last budget, the maximum contribution an individual can make in a year has been reduced from €150,000 to €115,000.
This means the maximum a person can put into a pension from this year is €47,150 (as this is €115,000 multiplied by 41pc).
The likelihood is that the maximum tax relievable amount will fall to €60,000. This will mean no more than €24,600 will be permitted to be put into a pension in any one year.
Maximising your savings
PAYE workers have a chance to maximise their pensions savings before the end of this month, just as the self-employed can do.
To do so, you will have file a tax return by filling out form 12. Doing this will allow PAYE workers, and the self-employed, to claim tax relief at 49pc, according to Mr Barr.
"This is the last year people will be able to do this as PRSI and the levy reliefs were abolished.
"It makes sense to salt away as much as you can afford. You need to secure a Form 12 (a tax return for 2010) from www.revenue.ie or your local tax office and send it to them by October 31."
The shockingly poor performance of managed funds in the last while means that many people are shying away from these.
The average fund lost 9pc of its value in the year to date.
Little wonder, then, that investor demand is high for lower-risk investments, with people increasingly leaving their pension fund in deposits, at least until stock markets settle down. Secure names are popular for deposits. Pensions providers such as Standard Life offer the option of having pension money put into AAA- and AA-rated banks such as RaboDirect, Nationwide UK and Barclays.
You can access popular lower-risk investment options such as deposits through your pension and collect income tax relief at 41pc too. Standard Life's Global Absolute Return Strategies fund (GARS) has proven its worth over a three-year period of tough markets, Mr Barr said.
The fund has delivered on its performance target of delivering an annualised six-month 5pc over a rolling three-year period. "GARS has returned an annualised 7.4pc from its launch on September 8, 2008, to October 7, 2011, which has been achieved in a period of challenging investment markets," he said, Irish investors have almost €1bn of their money in GARS, making it one of the top selling funds in the country.
"Returns from managed funds are very dependent on the return of equities -- absolute return funds, on the other hand, are much more diversified than managed funds and can hold strategies that protect investors even when markets are falling," said Mr Barr.
Irish Independent Supplement