Pensions pushed off priority list during cost-of-living crisis

Pensions may be near the top of the political agenda when it comes to the debate about the State pension age, but the topic is in danger of being pushed off the priority list completely for many younger people who are struggling to pay rent and day to day bills, let alone put money aside for use in 40 years’ time or later.

This is nothing particularly new, of course. Even before the current inflationary spiral hit Ireland had a worryingly low rate of supplementary pension cover over and above the State pension. The most recent pension coverage report from the Central Statistics Office revealed that one in three workers in the State have made no plan for income in retirement beyond the State pension. And only a quarter of workers between the ages of 20 and 24 had either a private or occupational pension.

The Government’s plan to address this is by introducing a national auto-enrolment pension scheme – details of which were announced, again earlier this month. The new scheme will see all workers aged between 23 and 60 and earning over €20,000 a year automatically enrolled in a workplace scheme. They will be able to opt out after six months but will be automatically re-enrolled two years later.

“The proposed auto-enrolment system has some important features,” says Alistair Byrne head of retirement strategy at State Street Global Advisors. “Firstly, people can opt out, for example if they need to pay down debt. Secondly, they will be re enrolled a few years later when their circumstances may have changed.”

Sustainability: A whole new set of reporting with potential to be transformative

---

Tools and applications, in common use elsewhere in life, are still not standard in healthcare settings

---

Futureproofing the health system requires a new prescription

---

Twenty years a-growing – Ireland’s most important health summit goes from strength to strength

---

The scheme is due to come into operation in 2024, but much work on supporting infrastructure is required before that.

In the meantime the advice to people is to start pension savings as soon as they possibly can. The cost of delay can be very high. For example, a 25-year-old earning €50,000 a year and aiming to retire at 65 on half their gross salary including the State pension would need to put 17 per cent of their salary or €8,500 a year into a scheme. If they delay until they are 35 that would rise to 25.4 per cent and €12,700. Putting it off another five years would see it increase to almost a third (32.3 per cent) of their gross salary or €16,150.

Those numbers get even more frightening for higher earners as the proportion made up by the State pension falls.

Alastair Byrne points to the benefits of starting early while acknowledging the difficulties presented by the current environment.

“For many people at present it will be a challenge to meet the cost of living and save for the future,” he says. “For younger employees it’s worth remembering that pension contributions typically get a top up from both the employer and from a tax deduction, so if they can be afforded they provide very good returns, a euro saved becomes two or more euros. And starting early means the pension investments have more time to grow through investment returns.”

Bank of Ireland head of pensions and investments Bernard Walsh echoes those views. “It is very understandable that people are asking how people can possibly talk to them about pensions when they are strapped for cash. But there is always something you can find to say you can’t plan for the future. If it’s not the rising cost of living it’s Covid, and if it’s not Covid it’s some bill coming up, and if it’s not that it’s something else. But the fact is that Irish people are saving. That’s what we are seeing this year.”

And he points to the efficiency of pensions as a savings mechanism. “If you can afford to save, that’s great. Pension savings gives you a better return on your money.”

That superior return is primarily delivered through tax relief. For a start an individual contributing €10,000 a year to a pension scheme and paying tax at the top 40 per cent rate will get €4,000 of it back in tax. One way of looking at that is a return of €4,000 on a €6,000 investment that year. And that’s before any growth in the investment itself – which is also tax free.

As well as that, as Byrne notes, employers almost invariably make a top-up contribution and this is also tax free as far as the employee is concerned.

“Outside of the family home for most people their pension is their most important asset,” says Walsh. “For a vast majority of people who are PAYE or self-employed workers it is an absolutely vital part of their financial infrastructure. If you can plan for a pension you only need to do it once if you do it well. You only have to check on it once in a while after that. You don’t have to keep thinking about it. You don’t have nagging doubts in the back of your mind the way you do when it comes to changing your car or whatever.”

Bank of Ireland carries out regular research among its pension customers. “They tell us they get a huge sense of relief when they have done it. They tell us they feel they have dealt with something really important. Even if they find they can’t afford to do it now, they can make a plan to do it later.”

At the other end of the age spectrum the retirement age has been much in the news of late. But this need not be set in stone, according to Byrne.

“For employees later in their career and closer to retirement, part of it will be considering what assets they have to fund retirement,” he says. “Finding out what State pension they will get and what pensions and savings they have. They can then think about when it might be realistic to retire. Again if there is scope to save or save more, pensions can benefit from useful top-ups from employer contributions and tax relief.”

For some the solution may be to work for longer. “This brings more income, potentially allows more saving, and preserves more of the pension to support spending at older ages. The proposal to allow deferral of State pension and have it paid later at a high rate provides some useful flexibility here. Our research finds many people enjoy continuing to work for both sense of purpose and social elements, even if only on a part-time basis.”

Finally, Walsh points out that if people do start now and find they can’t afford it they can always pause for a period before restarting. “The system is very flexible. You can reduce or stop payments for a while. But you should put a time limit on that and then go back.”