Saturday 10 December 2016

Pension pot is almost empty after huge bank bailout raids

Charlie Weston, Personal Finance Editor

Published 10/11/2011 | 05:00

Goodbody Stockbrokers chief economist Dermot O'Leary and director of pensions Brendan McGinn at the launch of a new report on Ireland's pension timebomb
Goodbody Stockbrokers chief economist Dermot O'Leary and director of pensions Brendan McGinn at the launch of a new report on Ireland's pension timebomb

THE State could have had a nest egg of €70bn to pay for social welfare and public sector pensions by 2025 if the National Pension Reserve Fund had not been raided to bail out the banks.

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Instead, the fund has been tapped to recapitalise the banks, with little now left, Goodbody Stockbrokers said yesterday.

What is left in the fund will be used for infrastructure projects and the country will now have to come up with new ways of dealing with pension costs.

Goodbody economist Dermot O'Leary said that such had been the pressure on the fund that it should be renamed the National Banking Bailout Fund.

"The National Pension Reserve Fund is now close to zero.

"It would have been around €70bn by 2025 if it had not been used to recapitalise the banks," he added.

If the fund had been allowed to build up it could have been so big it would have represented 30pc of the Republic's Gross National Product.

The State may get a return from investing in the banks, but this is not guaranteed, he added.

The fund was set up in April 2001 to meet as much as possible of the future cost of public and social welfare pensions.

The Government at the time decided to set aside 1pc of GNP every year to put into it. Despite the running down of the fund, the relative youth of Ireland's population meant there was still time to tackle Ireland's future pensions needs, Mr O'Leary said at the publication of a report entitled 'Pensions Realities for Ireland'.

Meanwhile, Goodbody's Brendan McGinn said any move to hike the 5pc drawdown rate on approved retirement funds (ARFs) would make them worthless as a retirement product.

The stockbroking firm admitted ARFs had been perceived as vehicles to avoid tax, but argued that the average size of an ARF was just €200,000.

A fund of €100,000 would be run down in around 20 years if 5pc was drawn down every year, with this amount rising by 3pc a year to cover inflation. This assumes growth of 4pc, Mr McGinn said.

There have been calls in the Dail for the drawdown percentage to rise from 5pc. Money drawn out of an ARF is subject to income tax.

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