Tuesday 27 September 2016

Men planning badly face a pension shock in old age

Many men are hung out to dry by their bosses when it comes to private pensions

Published 10/04/2016 | 02:30

by Tom Halliday
by Tom Halliday

Many men are in for a financial shock come retirement - because their bosses have let them down on pensions.

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Builders, fishermen, miners, and farmers - typically male-dominated jobs - often don't get the chance to open a pension through their work.

Many of these men will struggle to cover their day-to-day bills when they retire because they will be entirely dependent on the State pension - which is currently €233.30 a week.

"The areas where employers are often not good at providing pensions include agricultural employment and elements of the hospitality industry," said Pensions Ombudsman Paul Kenny.

"Pension provision can be bad in agricultural employment because farmers, as employers, have a very unpredictable income, which can be affected by all kinds of outside factors - including world commodity prices and weather.

"You can bet your bottom dollar that most of those working in takeaway outlets have no pensions. There are also a lot of self-employed men, whose income is not sufficient to allow them to save for pensions."

Other male-dominated jobs where the take-up or availability of work pensions is low include mining, quarrying and forestry.

Lower-paid people in the hospitality and retail sector - where many women work - often don't have company pensions either.

Although it is up to self-employed individuals to set up their own pension, a lot have failed to do so and will be a in precarious financial position come retirement as a result.

Sub-contractor pension woes

Many of those in the building trade work as self-employed building sub-contractors. These sub-contractors are at a major disadvantage when it comes to pensions. The company hiring a sub-contractor is not obliged to offer a pension - even though it may be offering a pension to employees of the firm. Some companies have taken on people as sub-contractors to shirk their pension responsibilities and to avoid paying social insurance contributions, according to Mr Kenny.

"A practice has developed where people are treated as sub-contractors, rather than as employees, which means these people end up on their own in terms of pension provision," said Mr Kenny.

"I believe that the system is being abused, although there are cases where there is a genuine need for self-employed subcontractors. For example, a small builder doing house extensions may have no need for a full-time plasterer, because that person is needed only when the job is being finished - so the small builder will quite legitimately use a self-employed contractor to do that work, and the subcontractor himself will work for a number of different builders over the course of the year. However, as long as a person is a subcontractor - as against an employee on a contract - he has no rights in relation to company pensions."

It's not just the loss of a company pension which puts sub-contractors at a disadvantage financially.

Employers have a duty to pay social insurance contributions on your behalf if you're an employee of the firm. These contributions make up your social insurance record, which in turn determines whether or not you're entitled to the contributory State pension, maternity benefit, sick pay, the dole and other social welfare benefits.

However, if you're taken on as a sub-contractor, the company that hires you doesn't have to pay social insurance contributions on your behalf; instead, it is up to you to do so.

Furthermore, while the social insurance contributions you pay as a self-employed individual usually cover you for the State pension, they won't cover you for the dole or sick pay.

The recession and your pension

The recent recession has dealt a blow to the pension hopes of many men. The same is true of women, of course. However, during the economic downturn, men were hit harder by unemployment than women were and losing your job can have dire consequences for your pension.

Job losses during the recession were most severe amongst builders and others working in construction, where most of the jobs are held by men.

"A lot of these people are now unemployed or have left the country," said Mr Kenny. "They will lose the future accumulation of pension benefits as a result of losing their jobs. However, they will not necessarily have lost any work-based pensions they had; what was already built up should be preserved."

The recession has had a significant impact on pensions, according to Peter Griffin, director of the Dublin pension firm, Allied Pension Trustees.

"There was a reluctance among young people to join a pension scheme, given the economic uncertainty at the time," said Mr Griffin.

"Also, when the recession began to bite, some members of defined contribution schemes (one of the two types of pensions) reduced their contributions or suspended their pension scheme membership completely."

With defined-contribution (DC) schemes, the value of your pension depends on how much you and your employer (if it chooses to do so) pays into your pension scheme over your working life and how well that money was invested. So any move to cut back on the amount of money saved into a DC scheme will take its toll on the pension you get down the line.

During the recession, many employers cut back on the amount they paid into DC schemes on behalf of employees, which meant members of those schemes lost out on a valuable boost to their pension savings.

"The onset of the recession in 2008 saw quite dramatic cuts in earnings for both companies and employees," said Brian McGarry, director with Invesco. "For owner managers and senior directors, it was very much a survival game in many businesses. The first casualty of this process was very often the pension plan. This usually started with contribution cuts by employers and employees."

Defined benefit (DB) schemes, which traditionally 'guarantee' to pay a percentage of your salary when you retire, are the other type of pension.

The number of DB schemes in Ireland has almost halved since the recession hit in 2008. Many of these schemes closed because the employers behind them went out of business during the downturn. Many others closed because they ran into financial difficulties - which meant they could no longer afford to pay pensions to their members. A lot of the DB schemes which have survived are only paying only a fraction of the pension they had originally promised.

Are you saving enough?

Even if you have a pension through work, you could be sorely disappointed come retirement.

"The vast majority of the Irish workforce are in for a shock when they retire," said Mr Griffin.

About 35pc of the workers with private pensions are public sector employees who will retire on reasonably good pensions.

"Of the remaining 65pc with some form of private pension, 13pc are in DB schemes sponsored by their employer - and many of these schemes have had their benefits reduced," said Mr Griffin.

"Just under 52pc of the working population with private pension savings are in DC schemes or have a PRSA (Personal Retirement Savings Account - a type of personal pension). The problem is that there simply isn't enough being saved into defined contribution pensions or PRSAs."

The average amount being saved into a DC pension is about 12pc of a worker's salary, according to a recent survey by the Irish Association of Pension Funds. "This is not sufficient to provide an adequate income in retirement," said Mr Griffin.

For example, a 30-year-old starting a DC pension today would need to save 22pc of his salary to retire on a pension equivalent to two-thirds of his wage - assuming he earns €37,000, according to Mr Griffin.

Men generally fare better on the pension front than women. Male workers who are in DC schemes usually retire on better pensions than their female counterparts - because they typically save more into their pensions than women do. But even then, many men's pensions still fall worryingly short. The average man will retire with a pension equivalent to 17pc of his final salary, according to a recent study of DC pensions by Irish Life.

"There are many good reasons to suggest that this average 17pc figure is too optimistic and it may well be lower," said Tony Gilhawley, a pension expert with Technical Guidance.

Your choice of job could clearly cost you your pension, particularly if you can't get one through work. However, even if your employer offers a good pension scheme, you too could fall through the pension cracks if you're not saving enough into it. Wise up on pensions - before it's too late.

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