Not ALF... we said ARF!

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DO YOU KNOW what an ARF is?

What about a PRSA?

Maybe you know what ‘annuity’ means, but if you don’t, read on.

There is plenty of advice out there about the benefits of starting a pension in your 20s and 30s, so we asked some experts to demystify the process for us.

1. Do I really need a pension?

David Malone head of communications and operations at The Pensions Authority:

Yes – because during your time at work you should ideally be saving for your time in retirement. That gives you the opportunity to have additional income to the state pension when you stop working. The state pension is €233.30 currently and if you want more than that to meet your needs in retirement, then you’ve got to save for it.

Maurice McCann, director at LHW Financial Planning:

You do – because the state pension is just not sufficient to keep someone in comfort in retirement and particularly because you aren’t likely to inherit large properties or assets. For 20 year olds who are trying to buy houses in a very tough market, pensions will come way down the priority list but it’s a critical part of your plan.

2. When is the right time to start?

David Malone from The Pensions Authority:

The optimum time really is, if you can, when you start work, particularly if you’re in taxable employment because the State supports you in saving for your retirement through the model of tax relief on pension contributions into approved pension arrangements.

The sooner you start, the better because you benefit from the compound growth of the savings that you make. However in saying that, the tax relief benefits continue to grow as you get older, so the closer you get to retirement you can put away a larger percentage of your income into a pension and gain tax relief on it.

3. Some of the terminology and acronyms are confusing. What’s an ARF?

Alan Morton is the managing director of the financial advisory service, Moneywise:

I concur; they are mind-boggling – even for someone with 20 years working in the industry.  ARF stands for Approved Retirement Fund and is simply a post-retirement vehicle to hold pension assets.  An income is paid out each year from this basket of assets.  Any assets remaining in the ARF on death go to your estate.

4. What’s an ‘annuity’ anyway?

David Quinn, financial advisor with Investwise, explains:

An annuity is a long term promise, made by a life assurance company, to pay the pensioner an income for life. The actuary will look at the retirement value of the clients pension fund, and using current interest rates, they will then offer an annual income payment. This income payment will depend heavily on age, and current interest rates. The older the client, the higher the annuity rate. Higher interest rates will also lead to higher annuity rates. As interest rates are at historic lows currently, so are annuity rates, which makes them unattractive in most cases.

5. How do I work out how much I should be saving?

Alan Morton of Moneywise:

Your first financial priority should be to buy a home.  Don’t worry too much about a pension until this is done.  If there is an employer pension contribution available, grab it with both hands, even if you must contribute.  It is the biggest financial no-brainer that you will ever land, especially if you pay tax at the higher rate.  As a rough guide, 15% of your salary should be paid in from age 30.  If you’re starting out later, that % should increase.

This pension calculator from the Pensions Authority might come in handy for anyone thinking about starting one.

6. My rent is sky-high. There is no way I can afford to save 10% or 15% of my earnings into a pension right now. What should I do?

LHW’s Maurice McCann says something small is better than nothing at all:

I would always advise someone to start, even if it’s at a level well below what I think is optimum because one of the most important things is to get into the habit of having a pension. Once it forms part of your finances you’re slower to ditch it and even if you’re paying at a low level as your income improves and as you get bonuses, or whatever, it’ll be on your radar as paying it in.

7. If I’m a PAYE worker, does my employer have to contribute to my pension?

David Malone of the Pensions Authority:

No. There is no obligation on an employer to set up a pension scheme in Ireland under the legislation, however they must as a minimum provide employees with access to a pension. So where there isn’t an occupational PRSA in place, they must give employees access to a PRSA scheme, but the employer does not have to contribute to it.

8. Hold on a second. What’s a PRSA?

David Malone explains:

A PRSA is a Personal Retirement Savings Account. There are a lot of acronyms in the pensions world and The Pensions Authority as the regulator is currently involved in a reform process to simplify pensions, particularly in the context of communications to members. It’s all complicated enough so it’s important that plain language can be used where possible.

9. What happens to my pension if I change jobs?

In a new job, you want to focus on the work and not worry about the change to your pension.

David Quinn explains this one:

You never lose your pension if you leave jobs, but some are more flexible and portable than others. If you are in a company / employer sponsored scheme, you have the option to leave the pension in the scheme, as a deferred member. You also have the option to move your benefits to your new employer or a preserved pension in your name (retirement bond).There are many other variables related to defined benefit pensions, personal pensions etc. The system is far too complicated at the moment and there are moves afoot to simplify the whole pension system in the next 3-5 years.

10. I have a pension plan. How often should I review it?

Alan Morton of Moneywise:

In your 20s and 30s, once a year is enough. And demand it from your provider. When you hit your 50s, regular reviews become much more important. And don’t invest in low risk investment funds in the early years; it’ll cost you in the long run. But be prepared for volatility.

11. I’m 35 and have no pension. Is it too late?

Maurice McCann says you haven’t missed the boat by a long-shot:

No, particularly if you’re in a company scheme. There are people in their early 60s who come to me and say: is it worth my while bothering to join the company scheme? I would say, jump in and pour all you can into it, because if you have reasonable service with that company you can take up to one and a half times your salary tax free when you retire. That would be unusual though – most people will have joined by their 40s.

More information on pensions can be found here.

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