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

Wondering whether you need to bite the bullet and sign up for a pension? Eamon Dwyer says the State Pension as we know it, might not exist by the time we retire.

Eamon Dwyer Managing Director, City Life

HAVE YOU HEARD of the “Pension Time Bomb”? Is it a hyperbolic scare tag line or is there something to it? I think the latter.

A point in time will come over the next 20 years where, if we don’t address an escalating situation, there simply won’t be enough money to pay the State Pension to someone who retires tomorrow. The evidence pointing towards this is stark.

Here in Ireland, we have a nasty habit of letting things slide until it’s a tad too late – think of the summer of 2007 and the subsequent aftermath of the property boom! The way this infected the wealthy, right down to the ordinary Joe Soap took us all by surprise.

We could multiply this effect significantly, I suggest, if we talk about the State Pension and how a collapse of this entitlement would impact on Irish society.

Potentially dire situation 

The State Pension is a huge part of the less well off in society’s income in retirement but, intuitively enough, becomes less important for the better-off.

To say that the decision makers in Irish society don’t seem entirely worried about this potentially dire situation for our communities is putting it mildly, even if it is somewhat understandable given the demographic of our legislators and policy makers.

Equally, the election to election mindset doesn’t marry well with long term planning.

I’m a financial advisor. I advise people every day on their retirement plans, from ordinary employees right up to very successful business owners. The one thing I advise about the State Pension nowadays is consistent across all sectors – don’t assume it will be there at all, and budget or save accordingly.

shutterstock_267218675 Source: Shutterstock/Photographee.eu

For the younger reader out there, and for those who don’t know the broad details, let’s re-cap.

Currently, allowing for a bit of generous rounding, the State Pension provides €12,000 per year per individual, assuming you get the full entitlement.

For those retiring after January 2021, the age at which you will receive it is 67, and for those retiring after January 2028, the age is 68.

These changes came into effect a couple of years ago, and were an attempt to make the State Pension less onerous on the State (and by implication, more likely to be paid into the future!).

We have a growing population, an exceptionally costly public sector (when you include the pension entitlements therein) and a pension reserve fund that has been wiped out due to the banking crisis.

Marry this with a non-existent strategy to build up a fund for yours and my State Pension, and the vision for this recipe for disaster begins to appear.

Today’s State Pension funded by a black hole

The State Pension is currently funded from some sort of black hole that lacks any sort of transparency and even for people who advise on retirement planning every day, we can’t work out the link between PRSI contributions, the pension entitlement and what/ if any strategy is in place to ensure the contributions made during one’s career are being managed in any sort of effective way.

The changes to retirement age made in 2014 don’t go nearly far enough. Instead, they have simply softened people up for changes to come.

And what changes are likely, you might ask? Well, the pension may become means tested at some point – effectively rendering the PRSI contributions you made during your career as simply another tax (if you don’t pass the test when it comes to it).

shutterstock_264841286 Source: Shutterstock/szefei

Or, they could push the retirement age out a further few years. This might be a smidge more acceptable, if medical advances continue to improve people’s longevity, and if the tendency to work later in life continues.

However, and I suspect most likely, we will see a reduced down basic pension, which might be payable to everyone from a certain age, and then a basic means test might be imposed for someone to qualify for an uplift.

One thing is certain. The God given right to the current pension in retirement is misguided at this stage and is highly unlikely to materialise. There is a pretty functional private pension system available in Ireland to those who want to avail of it, with generous tax reliefs.

Yes, it’s too complicated, but let that be refined in time. Save now for tomorrow and if we get the State Pension it will be a bonus, I think.

Eamon Dwyer is Managing Director with City Life Wealth Advisors, a Cork based advisory practice. Eamon can be contacted on 021 4358533 or info@citylife.ie. 

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About the author:

Eamon Dwyer  / Managing Director, City Life

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