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Your money: Act now to Covid-proof your pension

Many risk bearing the brunt of changes to working practices in years to come

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Peace of mind: Having your pension properly organised will allow for a relaxing retirement

Peace of mind: Having your pension properly organised will allow for a relaxing retirement

Peace of mind: Having your pension properly organised will allow for a relaxing retirement

Many of us are working differently under Covid-19, but women may be disproportionately financially affected. 

Whether it's juggling childcare while working from home or having to take an extended career break this year, one area where they will bear the brunt in the years to come is in retirement.

The UK's Institute for Fiscal Studies found the lockdown could end up widening the gender gap. Any break in contributions is exponential in its effect, so even a three-month unpaid career break can have disastrous consequences.

A 30-year-old woman on €35,000 a year would miss out on average by €719 in pension contributions which with inflation alone is €1,745 by the time she is 65 and far more based on normal pension investment returns. 

The ESRI published a report earlier this year showing the gap in earnings was already 35pc and as women are far more likely to be working part-time than men, often in unsteady, lower paid jobs, this is expected to exacerbate.

However, everyone experiencing different work practices will have to have regard to how it affects their retirement benefits. 

For anyone switching from permanent employee to contractor status, it's even more perilous. Companies with pension schemes often contribute a percentage of the worker's salary into it; if you're self-employed or contracted in, this no longer pertains, meaning workers have to fund their own pension entirely. 

While tax relief on contributions remains generous, there are plans mooted to 'standardise' the tax band in the budget. At present, taxpayers are granted relief on all pension premiums at their marginal rate, which for higher rate taxpayers is 40pc.

A number of reports have recommended instead either reducing this to 20pc (as per health insurance and medical expenses relief for instance) or middle-marking it at 33pc so that all taxpayers get the same break. 

The result either way is a diminution of the advantage of pension planning. As it is, the Government finds it all but impossible to get people to engage with their retirement, with less than 50pc of the population making private arrangements, and just 35pc of the self employed. 

In part, this is because we offer a generous cushion in the State pension (€12,911pa) from age 66, which is the second-highest in the EU. Pensioners pay less tax and at a later stage than workers and have added benefits in allowances such as the medical card and travel pass.

Plans to shunt the pension age to 67 and then 68 caused outrage during the election and resulted in the new coalition crying off. This is despite repeated pleas from the Fiscal Advisory Council that it is simply unaffordable and is only extending the bill for the next generation. 

It points to the fact that while there are currently five taxpayers supporting every one pensioner, in 25 years time, just two will have to do this job. This has happened in other countries, and resulted in later, or lower, pensions.

Automatic enrolment (AE) won't be in until 2022 at the earliest. Whilst successful in some countries (notably New Zealand and the UK), it falls woefully short of what people expect in retirement, compelling only those not already in a pension scheme and earning more than €20,000 to contribute 1.5pc, to start, of their salary. Even with the additional contributions from the State and employers it will be decades before the fruits of the lengthy labours will be seen. 

Women, part-time and lower-paid workers are less likely to benefit from AE. The self employed aren't even being included at the start up. 

So, what should you be doing now to Covid-proof your pension? 

Getting information for worried workers is vital, along with professional advice. 

Funds

Pension funds plummeted during the Covid crisis. This is because they are largely invested in equities. There are few company shares that improved during the pandemic, so it will take time to recover. 

Volatility is part and parcel of investments and pensions have the dual benefit of being both very long term and tax efficient. "Unless you are retiring imminently, there's no need to worry," says Mike Knightson, of KM Financial.

"Stock market corrections happen, markets move, that's why investments have historically outperformed cash over time. A fall in markets increases your purchasing power, this drop in value only becomes a loss if you cash out so if your fund has had a large drop in value then it may not be in your best interest to switch to a low-risk fund as this would crystallise a loss."

If you have a long time in excess of 10 years to retirement, you should focus on higher-risk investments such as shares which have long-term growth potential and aim to build up your retirement fund. A shorter timeframe should value lower-risk assets.

Most pension funds managed by insurance companies do this automatically; it's called 'life-styling' a pension.

 

Shortcuts: Accessing your pension pot early

Adverts on social media promising to ‘unlock’ benefits early may be attractive to 50-somethings on reduced incomes due to Covid-19 but it’s rarely recommended by experts.

Apart from ill health, retiring before 60 to access tax-free cash is only available to certain pensions from previous employments; you cannot retire on funds from a current employment unless you sever all ties. In some cases, transferring a pension pot to an Approved Retirement Fund (ARF) lets you access the tax-free portion early, while leaving the remaining fund for a future taxable annuity until age 61+.

It very much depends on the type of pension, says Mike Knightson, of KM Financial, who advises anybody considering it to get professional independent advice.

“A defined benefit (DB) plan has no guarantees relating to future returns, so before transferring it to a bond or ARF, the benefit of accessing cash today may be at the expense of a fixed, known pension later on.”

Defined contribution (DC) is more straightforward. “You’re reducing your pot by 25pc but can continue investing with the balance in an ARF.”

Those in public schemes (superannuation), eg teachers, nurses etc, who have ‘bought’ years, should check with their pension provider. Many of the 1,000 teachers being recruited for return to school arrangements will be retired, and should get specialist advice before taking up positions.

Irish Independent