Tuesday 20 August 2019

Pensions: a young person's game

Start planning for old age now, says Charlie Weston, who asks finance expert Frank Conway for this top tips on where to begin...


Frank Conway

SHOULD young people worry about pensions? The short answer is - no.

Instead of worrying, which solves nothing and causes bad health anyway, they should plan.

Pensions are mostly thought of as a savings plan for older people but in reality, they are a young person's game, according to finance expert Frank Conway.

However, because so much of the language that is used to describe and explain pensions is confusing, jargon-based and opaque, pensions can be a turn-off to the very people that really do need to know what they are, how they work and how they can offer real benefits, Mr Conway, editor of the Irish Financial Review, says.

Here, Mr Conway sets out some of the essentials about pensions.

Why they matter

Pensions really do matter to each of us. This is more so because of a raft of changes that have taken place over the last two decades.

To begin with, the medical experts predict that we will all live longer.

Whether it is as a result of taking better care of our bodies, advances in medical research or innovations in pharmaceuticals, people are living longer at current rates.

However, with a rapid rise in obesity and diabetes, it could be possible that this trend of living longer comes under severe pressure a few decades into the future.

But as of 2016, all signs point to a longer time frame in post-employment.

Government shifts the goalposts

For most people, a basic entitlement was the contributory pension which they pay for through taxation, or specifically pay-related social insurance (PRSI). But the Government is beginning to shift the goalposts here, which means that we may not qualify for the full €12,000.

Additionally, what used to be a retirement age of 65 has been increased and may move higher still.

Employers shift the responsibility

It is not just Government that is shifting the goalposts - employers are too.

Twenty years ago, if a person retired from a life of employment with a company, generally, they could expect to retire on a pension that would equal a set percentage of their final salary.

This could be half or three-quarters of their final salary.

It depended on the employer and the arrangement they put in place, but the bottom line is the amount retirees could plan for was a set amount.

These were called defined benefit (DB) plans. DB plans were a gold-star, financial windfall for those that received them.

But the basic formula for DB schemes never made sense and today, the overwhelming majority of companies that offer a pension do so with the far less attractive defined contribution (DC) arrangements.

The major difference between a DB and a DC pension arrangement is the risk, and this has been hoisted firmly on the shoulders of the employee.

Why such bad news

On the face of it, the pensions landscape looks fairly dismal. But all is not lost. The earlier point that pensions are a young person's game is still true.

Today, it is possible to grow personal wealth faster and more efficiently than ever before and - if one knows how to play the game - end up with a final pension pot that can be extremely generous indeed.

Taking advantage

The Government still gives back your tax if you put it into a pension (it is scaled to between 15pc of salary and 40pc of salary up the €115,000 threshold). That is called tax relief.

There are two words on successful investing; passive and fees.

The stock market grows at an average rate of about 6pc every year. Some years it crashes and more years, it booms, but on average, it sticks to that rate of growth.

If you can invest money in your mid-20s, over time and because of time, the rate of growth compounds.

In other words, growth builds on growth and the earlier you put your money in, the greater the chance that when you are older, you can actually take your foot off the investing pedal and leave the stock market to do the work, making your money grow.

Of course, as you move up the age ladder, you will need to adjust the level of risk your money is exposed to, but there is a formula for this.

Warren Buffet, one of the world's leading investment gurus, swears by this investment strategy.

Mr Buffet is a major advocate of cutting management fees on pension investments.

Ireland has a way to go in getting those costs under control, but there are some innovative companies that are a leading light on cutting costs.

The reward for someone aged 35 that earns €50,000 per year, puts 10pc of their income into a pension, where half is matched by their employer, factoring for tax relief, wage and economic inflation, average money growth of 6pc, but cutting ongoing charges figure (OCF) from 3.5pc to about 1.5pc, this can yield over €250,000 more for that person by age 70.

Millennials look to the future

MILLENNIALS have emerged as the age group to record the biggest increase in pension ownership.

There has been a strong rise in pension ownership among those between the ages of 25 to 34, according to investment group Standard Life.

The findings contradict one of the persistent criticisms of millennials as having a huge sense of entitlement and not prepared to do things for themselves.

Millennials is the marketing term for a person reaching young adulthood around the year 2000.

Now research carried out by iReach of 1,000 people for Standard Life has found more millennials are looking to the future.

There was a 14pc rise in pension ownership among those aged between 25 and 34 in the past six months.

Some 46pc of this age group has a private pension arrangement in place, the survey found.

Financial experts put the rise in pension ownership among younger people down to the fact the jobs market has been better in 2014 and 2015 than in earlier years.

They might feel more secure and better able to afford a pension after one to two years in the job, pension experts speculated.

The survey maintains that 53pc of workers now have a pension, up from 50pc last December.

This is back to 'Celtic Tiger' levels.

The numbers with a private pensions, outside the State contributory scheme, hit a low of 40pc in March 2011, Standard Life said.

The rise in the numbers of millennials putting a retirement plan in place is in contrast to older age groups where the numbers taking out a retirement plan are up only slightly.

The uplift in the number of young people taking out a pension comes after the head of the Pensions Authority, David Begg, warned recently that millennials will not have enough to live on when they retire.

He welcomed the Government continuing to examine the feasibility of an auto-enrolment pension system.

The survey also shows there has been a strong rise in millennials topping up their pension savings, through additional voluntary contributions (AVCs).

Standard Life' s pensions technical manager John McInerney said: "Millennial savers appear quite savvy. AVCs are typically used by the more sophisticated, well informed individual. It would be interesting if they discovered they're using AVCs while their parents, closer to retirement age are not."

Mr McInerney also believes many millennials have seen their parents or friends' parents final salary pension schemes decimated or reduced in value significantly.

They have learned from this and are likely to have been encouraged by their parents to save early and adequately into their own pension pots, he said.

Irish Independent

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