Friday 27 April 2018

Doing nothing on pensions isn't an option for most

One way ticket to pension poverty
One way ticket to pension poverty

Danny Mansergh

WHEN I talk to people who have retired, they often tell me that they started their first pension at work because "it was just what people did". They didn't really understand what a pension was and couldn't envisage a time when they would need one. Those same people also tell me how much they value the extra money coming in from their private pension every month.

Today's workers face a more uncertain future – changing demographics and a growing movement towards the defined contribution model of pensions mean that individuals now need to take a more active role in planning for retirement.

Many young workers who don't sign up to a company pension are losing out on the advantage of employer contributions. The average employer contribution is 7.2pc of pensionable salary – by not joining their company pension scheme, Irish employees are losing out on an estimated €80m each year.

Here are seven ways to take a more active approach to your retirement.

* Join your company pension plan – if your employer offers one.

In a typical defined contribution pension, where the employer matches an employee's contributions, it may cost a higher-rate taxpayer only €295 to invest €1,000 into their own individual pension plan.

* Reap the tax benefits. If you save €100 into a deposit account, you might have €102 in a year's time. If you sacrifice €100 of take-home pay as a higher-rate taxpayer so you can contribute to a pension, you can get €169 into your pension.

* Pay more into your defined contribution pension scheme if you can. As long as you stay within certain limits, you will still get full tax relief on those additional contributions.

* Consider your attitude to risk. It could be a good idea to reduce risk gradually over the last seven to 10 years before you retire.

It's equally important for younger pension savers to take some risk. At the early stages of your pension, investment growth is critical: contributions alone will not be enough to give most of those with defined contribution pensions a big enough pension.

* Don't rely on the State pension. Our population is getting older. In the future, there will be fewer workers and more pensioners.

Future governments will have difficulty keeping the State pension at existing levels of buying power. The value of the full contributory State pension is just under €12,000 a year – and not everyone qualifies for the full amount.

* Many members of defined contribution pension schemes do not want to make investment decisions at all, so they opt to have their contributions invested in a default fund.

This may or may not be appropriate. Many default funds have useful in-built features, such as an automatic reduction in risk as retirement approaches. However, you need to be clear that the default fund suits you, and that means finding out how it works.

* Get financial advice at and near retirement.

You will be confronted with multiple choices, including lump sums, annuities, impaired life annuities, and approved retirement funds. Your pension plan may well end up being one of your two most valuable assets (the other is the family home) so it's important to get expert advice.

Danny Mansergh is head of member communications at Mercer.

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