Act now as the pensions timebomb goes tick-tock...
Many of us will be funding a retired life that's almost as long as our working life, so it's no surprise that early financial planning is essential to making retirement as comfortable as possible, writes Sinead Ryan
One hundred and twenty isn't a very big number, but if you're in your mid-50s, that's how many pay-days you have left. It's said that retirement is the longest holiday of your life and these days, it's getting even longer. Most people can expect to live until nearly 90, meaning many of us will be funding a retired life that's almost as long as our working life.
Planning for that period takes time and money, but many are clueless when it comes to understanding the complexities of pensions. Eoin McGee of Prosperous Financial Services and presenter of RTÉ's How To Be Good With Money, says getting your facts together long before you're handed the gold watch is essential. "You need to find out what you have already a good five years out. A financial adviser can do this via a letter of authority which s/he can send to all pension providers and check if there are any benefits in your name.
"Most people will have changed jobs or career many times. I'm always shocked by how many pensions people have forgotten about. They worked somewhere a short time, there might only be €10,000 in a fund - but by now, it could be worth €50,000.
"It's never too late to start a pension," he adds. "Even the day before you retire, it's worth it for the tax breaks and efficiency. If you're still earning an income in your 60s, as many self-employed are, you can still contribute to a pension plan.
"There's never a bad time when turning six into 10 doesn't make sense," he says of the generous tax reliefs allowed on contributions.
What type of pension could you have?
There are a variety of pension types you may be eligible for:
State Non-Contributory: This is the most basic, means-tested 'old age' pension. It is paid to people who have not got sufficient PRSI contributions, or any privately funded pension. It's currently €232 per week, from age 66.
State Contributory: Based on PRSI contributions, at its maximum, it's worth €243.30pw from age 66, rising to age 67 in 2021.
Occupational Scheme: If you worked for a company that had a pension plan in place, whether or not the employer contributed to it, you may have a pension entitlement. Pensions are rarely allowed to be 'cashed in' before retirement, so the fund may still be 'ring fenced' for you.
Personal/PRSA: If you were self-employed, or worked for a company with no pension scheme, you may have had a personal pension plan. Insurers will have records based on your name, date of birth and PPS number.
What happens on retirement?
There's a bewildering and confusing array of products available once you retire. Often people are left completely in the dark about what to do on their 65th birthday and companies rarely pension plan for their workers.
Joe Hanrahan, Wealth Manager with Investec, says that the primary purpose of a pension is to provide an income for life. "This was traditionally done through an annuity, but interest rates are so poor that most people opt for an Approved Retirement Fund (ARF) these days instead.
"You will normally get a lump sum tax-free (around 25pc of the total fund, or 1.5 times your final salary, up to €200,000 depending on the plan), and you can put the balance in an ARF where it can be drawn down at 4pc per annum until age 71 and 5pc thereafter."
He adds: "The first thing is to decide what to do with your lump sum. Most people clear down residual debt, buy a car or give their kids deposits for a mortgage. You might decide to have a second honeymoon or do some bucket list stuff, for instance."
He finds that many clients often don't think through the purpose of all their hard saving. "I'm astounded by the number of people more concerned with legacy and inheritance rather than putting themselves front and centre - focus on yourself first! You spent most of your working life without a lot of discretionary spend - it's hard to change the habits of a lifetime, but now's the time to fly business class, because your son-in-law will."
Pensioners are treated far more sympathetically by Revenue than workers. They can earn up to €18,000 p.a. (€36,000 for a couple) before paying any income tax, while USC and PRSI are reduced or removed also.
But, warns Andrew Fahy of Investec, if you're looking to supplement your income in other ways, you need to be careful. "A lot of people are advised to invest lump sums into policies with life insurance companies to provide extra income. But these are taxed at 41pc on the gain, which is very high. You have to consider other options, like investment trusts where the tax treatment is different, by getting specialist advice."
Using equity in the family home to downsize and provide an income is popular. Moving to a smaller manageable property cuts property tax, heating bills and maintenance.
However, buying a second house to rent can be fraught, says Fahy. "It's lots of hassle - there's income tax on the full rental income as there's no mortgage. Typically we see more astute people with an investment portfolio of REITs [real estate investment trust] instead, rather than one house if they want property."
Your health is your wealth
Health becomes a priority as we get older and if you have private health insurance, now is the time to start reviewing it.
Dermot Goode of TotalHealthCover.ie says older people should consider changing elements of their plan in their 50s to ensure quality cover when they retire.
"Firstly, it's important to recognise that you need to spend €1,250-€1,450 per adult, per year. The days of getting good cover for €800 are over. If you need to upgrade, there'll be a two-year waiting list for the increased benefits to kick in - so now, while you're healthy, is the time to start.
Reduce the level of excess on your plan - it's often set at €250, but day case-procedures will start popping up, and you don't want to pay that much. Drop it to €75 or €100.
"Consider what kind of hospital accommodation you want should you need it," he adds. "Many older people don't like sharing in a multi-occupancy room - they want their own bathroom, private space for visitors and the TV. That means a private room in a private hospital, as you have little or no chance of getting one in public. A decent Corporate plan costing €1,330-€1,400 will give it to you."
He adds: "Corporate plans with increased out-patient expenses are excellent - you'll get €50 or €75 back for every GP, physio or consultant visit."
Next, if you still have adult children on your plan, get them off! They'll stay there, with you paying full price when they should be getting their own policy. If they're working, their company might provide health cover, so you're wasting money."
Older people are more likely to have orthopaedic and ophthalmic procedures. "Private hospitals are doing lots of deals on this, if you have decent cover," says Goode.