Sunday 26 February 2017

It's never too late to start your own nest egg

While making ends meet is a priority for most right now, it would be wise to plan for your future financial security, says John Cradden

JOHN CRADDEN

IF your employer doesn't have a company scheme and you haven't already started one by yourself, a personal pension may still be the last thing on your mind.

Amid the recession, you may be focused more on trying to make ends meet following a pay cut, for instance.

Social and Family Affairs Minister Mary Hanafin is due to publish a review of the Government's pensions policy that will propose new ways to improve the worsening situation regarding the state pension provision in the years to come.

But the central problem remains a stark one. The state pension is considered by 80pc of people to be inadequate to their retirement needs, but just 50pc of women and 56pc of men in the workforce have a personal pension.

So if your new year's resolution is to start a personal pension, what are the first steps you should take?

"Speak to an expert," says Emer Kirk of the Independent Trustee Company, which helps run pension trusts. "Pension products are complex and you have a number of decisions to make."

For a start, you need to decide why you are setting up a pension. For some people it's for tax purposes, but for most it's about buying their future financial security, says Ms Kirk.

The next issues are affordability, the number of years you need to accumulate your fund, and your attitude to investment risk. "Only then should you start looking at what pension product is suitable," she says.

The website of the Pensions Board has a calculator that can help you work out how many years you need to save based on how much you can afford to put into your fund each month.

For example, if you are male, aged 30, with an annual salary of €35,000 a year and you want a pension income of 60pc of this amount at age 65, which includes your state pension entitlement, you would have to save €350 (or €280 after tax relief) a month.

However, this assumes that only you are paying into your pension fund. This would be the case if you set up a personal pension scheme.

A PRSA (Personal Retirement Savings Account) is a more flexible option for those who want to set up a personal pension. The main difference between this product and a personal pension scheme is that employers can contribute to it.

Employers who do not have a company pension scheme are obliged to offer their employees access to a PRSA if they request it, although they don't have to contribute to it.

"If the nature of your employment is that frequent changes of employer are common, such as the IT industry, a PRSA can offer greater flexibility," says Mr Ferguson.

"However, if you're unlikely to be changing job any time soon and your employer is not willing to pay contributions into your pension, a personal pension plan may be better as they tend to offer a wider range of funds, and the annual fund management charge on a personal pension can be lower than that on a PRSA."

In other words, personal pensions may be more suitable for those who are self-employed but also those in steady employment but with no prospect of their employers contributing to their pension.

However, a personal pension may only be a better bet if you can find one where the charges you pay would be lower than those of a PRSA.

"While there is a statutory cap on charges on standard PRSAs, of 5pc of each contribution and 1pc of the fund annually, there is no such cap on charges on personal pensions," says Mr Ferguson. There is a further distinction among PRSA products that is worth noting too. "If you go the PRSA route, you should always go for a standard PRSA unless you have specific fund requirements that can only be accommodated through a non-standard PRSA," says Mr Ferguson. The statutory caps on charges that apply to standard PRSAs do not apply to non-standard ones.

"The charges on non-standard PRSAs can be, and often are higher than standard so you need to be sure that you really can't do without the extra fund choices before committing to a non-standard PRSA," he says.

Like Ms Kirk, Mr Ferguson also recommends getting professional advice, preferably from an independent broker.

But if you are well-informed about pension products, you can get good deals on charges from a number of online brokers who will set up your pension on an execution-only basis, i.e. without any financial advice.

* Visit the Financial Regulator's personal finance website, www.itsyourmoney.ie, as well as www.pensionsboard.ie, for more information.

Irish Independent

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