Don’t bank on the State

In theory, reaching retirement age should have lots going for it from a financial perspective. By the time many people arrive at that stage of their lives, some of their regular expenses are likely to have disappeared or diminished. They may be close to paying off their mortgage. If they have finished working, they will have stopped paying into a pension fund. Any children they may have are likely to have left the family home by then, or at the very least are less dependent on parental handouts.

In reality, other expenses are likely to replace those expected savings; it turns out that free time costs money. "When someone is in full-time employment, they tend not to spend much during the day, but when in retirement, people need to allow for spending more money," says Bernard Walsh, head of pensions and investments at Bank of Ireland.

Leisure activities like a long-planned post-retirement holiday will eat into any retirement lump sums. Then there are ongoing costs of living to consider. Prices for necessary items like healthcare, energy bills and insurance are rising for older people, as Age Action noted in its pre-Budget submission.

For someone who is likely to be swapping one set of outgoings for another, they need to consider whether the State pension will be enough for them to live comfortably. The contributory State pension currently starts paying out from age 66 onwards to people who have made enough social insurance contributions. It’s €232 per week for people aged between 66 and 80, rising to €242 per week for those over 80. No tax charges apply if it is a person’s only source of income.

From 2021, the qualifying age for the State pension will rise to 67, and it will increase by another year after 2028. Anyone who had been planning to stop working before then will need to think about how they plan to cover their living expenses.

It’s telling that some financial advisers have stopped factoring the State pension into their calculation models when advising clients on retirement planning. “We’re going to be living much, much longer. Personally, I would not like to be looking towards retirement and having any reliance on the State at all, so that should focus minds even more,” says Richard Kearney, associate director at Davy.

Standard of living

Walsh says a growing number of people who don’t have private pension savings will suffer a major drop in their standard of living. “If someone had been earning €25,000, then the State pension will probably meet their needs, but if you take someone who’s earning €40,000 or €50,000, a lot of people in that bracket will see a 70 per cent drop in their living standards,” he says.

When the Government launched its Roadmap for Pensions Reform 2018-2023 earlier this year, it announced plans to maintain the value of State pension payments at 34/35 per cent of average earnings. It intends to link future increases to changes in prices or wages, or possibly both.

The Government maintains the State pension “will remain as the fundamental bedrock of the pensions system in Ireland”. Its new ‘Automatic-Enrolment’ retirement savings system, which is due to start in 2022, aims to encourage people to start personal savings plans.

With that in mind, sooner is better when it comes to saving for retirement. “The average age at which people are starting pensions now is the mid-40s, but the consequences of delaying are quite extreme. People should start early, save as much as they can, and make sure their money is invested wisely to maximise the return,” says Walsh.

Although the State pension looks set to stay in place, its future role will be to supplement other savings, rather than being the core component of any retirement plan.