Tuesday 12 November 2019

Grab a (home-brewed) coffee - here's how to pay for your pension

A thorough personal financial audit is essential to identify and eliminate waste (sorry, takeaway and coffee fans) and to use those savings to start or add to your pension pot - the reality is, you can't afford not to, writes Sinead Ryan

Bean counter: Cutting down on takeaway coffees for some people will add up to huge savings over a year
Bean counter: Cutting down on takeaway coffees for some people will add up to huge savings over a year
Sinead Ryan

Sinead Ryan

The most common reason people give for not having a pension is that they "can't afford one".

It doesn't matter that, given current life expectancy, they may well be retired for as long as they worked, providing for the future is simply too abstract a concept for many.

Unlike the SSIA, or a simple savings account, where you can see the amount build up easily, and light at the end of the contribution tunnel, retirement can be too far away to focus our mind.

With bills, mortgages, childcare and the myriad other things we have to fund in our lives, something 30 years away doesn't get priority.

There's also a misconception about what's already available. Many people cite the State as their primary source of income in retirement and, for 93.2pc, it is. Just 55pc of men, and 28pc of women in retirement have a separate, occupational pension to supplement it, according to Tilda data.

The ESRI says that the average disposable household income for people aged 66 and over is €21,412 - the lowest of any demographic. Given that this is the generation with more asset wealth than any other, and largely home-owners with no mortgage, it should be a warning shot to workers today who may think not paying into a pension is saving them money, but in fact it's only storing up problems.

"The State pension is generous" is another common refrain. It is - we're the second- highest payers to pensioners in Europe, only behind Denmark, once the free travel and medical card are taken into account. However, it's relative. At its most generous, the contributory pension is €248.30 per week, or €12,911.60 a year. Many get a lower rate based on their 'stamps' or contributions, which may not be sufficient.

"My company will look after me" is the final defence of the unprepared. While you may well be lucky enough to have an occupational pension, many schemes have already come a cropper with decimated funds, lower payouts and uncertainty surrounding pensioner rights.

Even the gold-plated Defined Benefit (DB) schemes (or the public sector pensions, which amount to the same) are less evident and up to recently some 70pc of them were insolvent, leading to renewed efforts by the Pensions Authority to shut them down or have companies fund them differently.

Their efficacy is sometimes masked by their volume. According to the Pensions Authority, Ireland holds 50pc of all pension schemes in Europe. Once the UK leaves the EU, that'll rise to 90pc. It doesn't mean we're brilliant at contributing into them - it's legacy issues surrounding the vast number of one-person schemes set up years ago.

So, looking after your own financial wellbeing has never been more of a priority.

Bread and butter

Eoin McGee of RTÉ's How to Be Good With Money dismisses the idea of not being able to afford a pension. "If you don't have enough money now to put into a pension, how do you expect to have enough when you retire to 'pay into' things like bread and butter, light and heat? It is very difficult for people to take money away from today's expenditure for some event far off in the future. The reality is that it is important. I would suggest starting a pension at any level. Pay in so little that you would be embarrassed if you couldn't do it each month. Once you start to commit, regularly increase it bit by bit. Automate the payment and the increases."

Future-proofing is all very well, but where do you find the wherewithal? "Finding the money can be hard, but how about just giving up a luxury like takeaway food," says McGee.

"What I find really interesting is when we ask new clients to fill out a form detailing what they spend their money on. Regardless of income levels, almost everybody is surprised. For example, some say, 'I can't believe we spend €100 per week between the two of us for lunches at work,' but it really hits home when you remind them they haven't been on holidays for two years and the last time they went, it cost them €3,500 - which is a lot less than the €5,200 per year they are spending on lunch.

"Lunches and coffees are the 'go to' target for people like me when it comes to cutting costs."

Tax relief

Tax relief is always cited as a good enough reason on its own to take out a pension, but studies have shown it's a concept little understood on a day-to-day basis.

"Think about what pension contributions do for you today, rather than in the future," says McGee. "It turns €6 into €10 every single time. Hands down, I do not know a better investment out there that is Government-backed that gives you that type of a return. In simple terms, this works on the basis that when you put €10 into your pension, you pay €4 less (or €2 on the lower rate) in tax. After that, the fund grows tax-free. You can't get that anywhere else."

Most people have savings languishing in the bank or post office - in fact there's €101bn of it on deposit, losing money due to inflation.

McGee says some of this could be diverted to a pension plan, gain tax relief and start working instead. "Siphon off what you are comfortable with and transfer it to pension," he says.  

Five things to do this month

1 Write down everything you spend (diary, app or receipts). You'll see a pattern emerging which may identify waste.

2 Calculate how much you can put away every month - anything is a good start.

3 Use a pension calculator to find out the gap between what you're earning now and what you'll earn in retirement (see pensionsauthority.ie).

4 Find out who looks after the pension where you work. Ask them for your benefit statement (it's the law to issue one every year) and, more importantly, ask them to explain, in today's money, how much you're on target to get in retirement.

5 October is the tax deadline for 2018. That means you can contribute to last year's pension but get tax relief now, even as a PAYE worker. You have until 14 November to do so. It's called an Additional Voluntary Contribution (AVC) and you'll get a cheque back from Revenue before Christmas for the 'overpaid' tax.

Irish Independent

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