Can I wait until 65 to decide on pension?
Q I'm 57 and in a defined contribution pension scheme through work. Some of my colleagues are already talking about Approved Retirement Funds (ARFs) and annuities. Do I need to plan my retirement decisions now or wait until I'm 65? Imelda, Dun Laoghaire, Co Dublin
I appreciate retirement is a little bit away but ideally I'd advise to decide now whether you will choose an annuity or an ARF when you hit 65, as this decision should influence your investment strategy between now and then. To help with your decision, I have set out the differences between the two and why one might be best suited to you over the other.
An annuity is a contract which will pay you a guaranteed, regular pension income for life, whereas an ARF is a retirement investment fund which allows you to keep your money invested as a lump sum after retirement, which you can then manage and withdraw from as you see fit.
There are both pros and cons to each option and the suitability of each will depend on your personal situation. The plus side with an annuity is that it will provide you with a regular income stream. The down side is that the annuity rate is fixed the day you buy the annuity - so if annuity rates increase after your buy your annuity, you won't get the benefit of the higher rate. Annuity rates are driven by interest rates and you pay a lot more for annuities when interest rates are low.
The ARF option is more flexible in that your monies will be invested and can be 'drawn down' as and when needed. However, because this is no longer treated like a pension, it will be subject to tax, with the Government requiring you to draw down at least 5pc of the fund on an annual basis. You also have to ensure it will last you for your lifetime.
Experience would suggest that people put off making the choice until they have to. However, it is probably better to give this decision some consideration in advance of you hitting retirement age. That way, you can plan for one over the other as you face into the final years of pension contributions - this decision will dictate your investment strategy until it matures.
For example, if you favour the ARF option, you will probably start withdrawing relatively small amounts from the fund in the years following retirement - so you can afford to treat the ARF as a 20-year (or more) investment.
However, if you lean towards the guaranteed annuity, you will effectively withdraw 100pc of your fund at 65, so you'll need to take a much more conservative approach to investment risk over the final years of pension contribution - which may slow the growth of the fund.
Your first port of call in this instance should be to get in touch with the trustees of your scheme and see what information or support they can give you. You may also want to engage the expertise of an experienced independent financial adviser. Planning for the period in your life in which you will no longer work and so will no longer have a regular wage is crucial if you want to enjoy this next phase of your life.
State pension eligibility
Q Can you clarify where social welfare contributions at the public (civil) service rate figure in the new qualification system for the contributory State pension (that is, the Total Contribution Approach)? If an individual had more than 700 contributions at full rate and 31 years of lower rate contributions, are these combined for the purposes of calculating one's entitlement to the State pension?
Swords, Co Dublin
The Government recently published a 'Roadmap for Pensions Reform' which set out a timetable for introducing a Total Contributions Approach for the State contributory pension. A detailed proposal and consultation is scheduled for the first half of this year, with legislation by the end of 2020.
Currently there is a basis for combining mixed contributions for possible entitlement to a pro-rata pension. You will need to check with the Department of Employment Affairs and Social Protection as the department says it depends on the exact circumstances of each case. It could happen that one person would qualify while another, who might have more contributions, would not qualify. Your local social welfare office or the main social welfare office in Sligo (Telephone 071-9157100 or Lo-call 1890 500000) should be able to help you.
Adequacy of pension savings
Q I'm single, 52 and self-employed. When you're in your 50s and haven't put that much away for a pension, what is a reasonable level of saving? Some of my friends say 5pc of your income, while others say 25pc.
Tralee, Co Kerry
You're correct to be concerned that you've left it a little late to save the right amount into your pension - but rather than let it be any further cause for concern, turn your attention to the steps you can now take to prepare for the time ahead. You might also take solace in the fact that your situation is not uncommon - many self-employed people spend years establishing and reinvesting in their business and as a result their pension suffers because they put saving for retirement on the long finger. Most believe that they will plough in a significant proportion of their income in later years once their business and possibly their family expenses have reduced. You appear to have mirrored this strategy, so I'd suggest that you consider contributing the maximum you can afford.
Tax relief is a significant factor in the affordability of pension savings - at your age, you can get tax relief on pension contributions equivalent to 30pc of your net relevant earnings. At the age of 55, that rises to 35pc; at the age of 60, it rises to 40pc. If you have a limited company, the limits can be considerably higher. Time is of the essence now. Unless you plan to work beyond 70, start saving seriously for your pension now.
Pension persuasion for kids
Q My kids are aged 22 and 25 and have really well-paid jobs. They're not planning to marry or have kids until their late 30s. This means they'll still be financially looking after their children when they're in their 60s. Should I persuade them to get much of their pension saving done before they have children and mortgages?
Your desire for your children to start preparing for their retirement now is wise. If you can persuade your kids to do as you have suggested, they will thank you in the long-run.
People working in the pension community often talk about time being far more important than money when it comes to pension saving. Basically, it's the early savings that really make the difference. This isn't just an assumption - the actuarial calculations prove this to be true.
If your kids were to save, say just 10pc of their gross incomes, at a time when they may still be living at home and have the greatest proportion of disposable income they may ever have, this could really set them up for a comfortable retirement. If their employers have pension schemes, they will also get the benefit of what the employer will pay into it.
That money will continue to grow untaxed until they draw it down.
Jerry Moriarty is CEO of the Irish Association of Pension Funds (iapf.ie)
Sunday Indo Business