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Worried about financial security? Here are 7 tips on how to get the right pension

The Money Doctor, John Lowe, explains how to make to most of your money and ensure you have enough to retire on.

John Lowe The Money Doctor

WE IN IRELAND are on a pension time bomb.

Currently, there are 677,000 pensioners over the age of 66 drawing €233.30 per week through the state pension. For every person who retired five years ago, there were six workers. By 2050, there will only be two workers per retiree, but our pensionable population will have grown to 1.8 million by then.

Government payments to pensioners will be unsustainable unless something is done now to address the problem.

There are currently no plans to raise the pension age beyond 68 here in Ireland, but it is interesting that Germany has announced they are considering raising their retirement age to 69 by the year 2060.

According to recent research, by the year 2030, the average life expectancy of men will be 85.7 years and 87.6 years for women. Therefore, you need to prepare to live a long time and make sure you have enough money to maintain your lifestyle after you stop working.

Yet there is still a significant percentage of the working population who, for whatever reason, have decided to ignore this problem. Close to half the working population currently have no pension plan in place at all.

Every individual has to take responsibility for their pension planning and not rely on others to do it for them. You are never too young to start a pension – the younger, the better.

Here are some tips to keep in mind when deciding to start a pension.

1) Figure out how much you need to put aside

Do an annual budget. You can work out with an adviser how much money you will need on a monthly basis when you retire. This will include inflation, your attitude to risk and your primary retirement objective; do you have any desire to leave assets behind or merely wish to have enough income to see out your days?

You will also need to have an investment strategy put in place. Your fund needs to grow.

Here’s a guideline for the percentage of income you should contribute depending on your age:

20 – 29              15%
30 – 39              20%
40 – 49              25%
50 – 54              30%
55 – 59              35%
60+                    40%

However, if you can’t afford to put aside that much now, remember it’s better to save something than nothing.

2) Take advantage of tax breaks

The advantage to starting a specific pension account rather than just keeping the money in savings is that a pension attracts specific tax breaks. The three tax breaks are:

  • Tax relief on the contribution that you make to your pension at your marginal rate of tax (i.e. you won’t be taxed on income you put directly into your pension fund)
  • Tax-free growth in the pension fund
  • The availability of a tax-free lump sum from the pension fund at retirement age of up to 25% of the fund to a maximum of €200,000

3) Put your money in the right type of plan for you

The type of pension you start is determined by your employment status. An employee in a company that has a pension provision will be a member of a company or group pension. This is also called an Occupational Pension Plan. He/she can also make additional contributions to the pension plan by way of an Additional Voluntary.

For everyone else, here are the options available to you:

  • Company director: An Executive Pension Plan, or a Small Self Administered Pension (SSAPs) which is another name is the Self-Directed Trust.
  • Employee not in a group plan: A Personal Pension Plan, a Personal Retirement Savings Account (PRSA).
  • Self-employed individual: A Personal Pension Plan, a Personal Retirement Savings Account (PRSA) or a Self Invested Personal Pension.
  • An unemployed individual or a homemaker: A Personal Retirement Savings Account (PRSA). However, as they may have no taxable income, they cannot claim tax relief on the monthly contributions.

4) Reassess and review your plan

It is critical that you review your pension on a regular basis – at least once a year. The size of your pension fund is driven by a number of factors, such as the performance of the assets your pension is invested in, fees and charges, the contributions that you make and the length of time between starting the pension and retirement age.

Most pensions are invested in a mixture of shares, property, bonds and cash. Fortunately, over the last seven years, other than cash, these asset classes have grown handsomely.

But just like nine years ago, we could experience another “correction” – the next bear market (where share prices fall and selling is encouraged).

For an individual with over 10 years to retirement age, this should not be an issue. However, for those people who are closer to retirement age, there could be a detrimental effect on the final income that they will receive at retirement due to timing. Therefore, it is crucial to review your pension every year.

5) Don’t be lulled into a false sense of security

Having an employer make a contribution to your pension is very advantageous for two reasons:

  1. The contribution that your employer makes is not taxable either as an income or a benefit in kind.
  2. It increases the overall contribution that goes into your pension fund.

But many people are lulled into a false sense of security because they are in an employer-sponsored pension. They believe that this pension is somehow guaranteed and that it does not need to be reviewed, whether a Defined Benefit Pension or a Defined Contribution Pension.

Many also believe 5% contribution from the employer along with their own 5% will suffice for their future retirement income. Try living off 10% now!

If you are in an employer-sponsored pension, you should still review this pension on a regular basis.

6) Figure out how much you’re paying in fees

When you meet an adviser for the first time, you should be given a Terms of Business. This will tell you what insurance and investment agencies the adviser maintains, and how the adviser earns their fees. It is important for you to know how much the adviser earns from doing business with you.

7) Save before it’s too late

For most people, apathy, ignorance and lack of time are the three reasons they put off organising their pensions.

Reading an article such as this is a complete waste of time if this is relevant to you and you then do not act on it within 48 hours, after which time you’re likely to forget about it.

Save now before it is too late.

John Lowe is managing director of Providence Finance Services Limited and author of The Money Doctor annuals. You can visit his website for more information. 

Read: The average pension payout for Irish people is just €6,000 per year at present

Read: Will the State Pension actually be there for me when I retire?

About the author:

John Lowe  / The Money Doctor

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