‘It’s never too late to start a pension’

While we should be rejoicing that people are living longer, funding those extra years is a concern for many, especially when a State pension for all is no longer a certainty in years to come.

By 2055, there will be one pensioner to every 2.3 workers; in 2015 that ratio was 1:5. Ireland also has a relatively large number of people unemployed in the 55-64 age bracket, who are predominately reliant on State support for their income. Added to that, a large number of people are not saving for their later years, in the form of a pension.

Alistair Byrne of financial services company State Street says the fact people are living longer is a positive and should be celebrated, but says the question needs to be asked, how do we accommodate it?

Gradual retirement is becoming more prevalent, with people enjoying the economic benefits they get from continuing in some form of work and this will ease the situation somewhat, he says.

“There is a lot of research around life changes as life spans lengthen. Currently, people are in education till their early 20s, work till 65, and then a life of leisure in retirement but we see that as changing and we see more multi-stage life stuff when it comes to retirement. It’s no longer the pre-determined cliff edge.

“People often get a sense of purpose and engagement from work – and social contact is important too. This is not the same as saying people want to work 50 hours a week but they might want to stay active in the workplace somewhat,” Byrne says.

To accommodate this, the Government should make it easier for people to work into later life, if they wish, in the form of potential reforms to the labour market, he adds.

“Compulsory retirement ages are unhelpful, and instead we should be focused on someone’s ability and wellness to work and not on an arbitrary date [to stop working]. That’s not to say we should be forcing people to work in later life if they don’t want to or they can’t, and there should be good safety nets there for those who can’t.”

Regarding those not in employment between the ages of 55 and 64, financial planning manager at Davy Paula Finlay says those individuals should be encouraged to join the workforce and make additional contributions to the exchequer.

‘A win-win’

“In EU countries with higher workforce participation among older people, their employment doesn’t crowd out younger workers and these countries have higher overall incomes. Working later can also bring physical and mental health benefits. It’s a win-win,” she says.

Ireland currently has one of the largest pension gaps in the OECD, lagging only behind the UK, which has already put an auto-enrolment (AE) scheme in place. AE will be introduced in Ireland in 2022.

Byrne says auto-enrolment will help a lot, with proposed contribution levels up to 14 per cent “entirely appropriate”.

“That will generate a decent income, but higher earners will need to save a bit more than that,” he says.

Opt-out is also important, for those who may not be able to save at any given time, he adds.

Great demands will be placed on SMEs, and entrepreneurs in particular, in the years ahead. Two thirds of private-sector workers have no pension arrangements currently and most of those are in SMEs, Joanne Roche, director, KPMG says.

“This group will be most impacted by the funding requirements under the auto-enrolment, which ratchet up very quickly over the six years starting in 2022.

“In practice, the competing financial demands of funding the business are likely to mean that the entrepreneur begins to make pension provision, or at least meaningful pension provision, at a later stage in their working life than an employee. In those instances, the tax system needs to cater for late and lumpy pension contributions. The current age-related limits on employee contributions are restrictive in that regard,” she says.

She advocates a “whole-of-life” approach to pension tax relief, in other words, “if you don’t use it, you will not lose it” when it comes to tax relief on pension contributions.

The dissemination of information around pensions is also vital, if the bridge is to be gapped, Roche says.

“Given the relative immaturity of the ARF [approved retirement fund] market and associated advice propositions to date, there is an opportunity to develop and roll out high-quality, low-cost advice to the mass market. This could be done through an independent State-sponsored body such as the Citizens Information Board.

‘Taxation implications’

“As Ireland’s population ages and individuals retire out of defined contribution schemes, an increasing number of individuals need good-quality and low-cost advice on their retirement options. This includes advice on the most appropriate investment choices and the taxation implications of choices.

“We recognise that the question of providing adequate advice to consumers is a challenging one to address. Even if the future pension environment is more streamlined, with a reduced number of products, there is a risk that those consumers most in need of advice may seek it least and affordability is an issue.

“Many consumers who do not understand the differences between products will have a need for information on various product choices and when each can come into play for them through early, middle and late retirement phases as their needs evolve,” she says.

The resounding message in relation to looking after an aging population is to start saving and do it now.

“It’s never too late to start a pension– most employers will offer some sort of scheme. They may match or even double your contribution. If you earn over €35,000 per annum, your €1 contribution can translate into a €4 injection to your pension when you take account of €1 tax back and a €2 employer contribution,” Paula Finlay says.

“The Government needs to increase private pension coverage. They are in the process of simplifying pensions, making them easier to understand and administer.

“Making more contributions at an earlier age means that you’ll need to make less contributions overall to bridge the retirement savings gap,” she adds.

The numbers

It’s important to note that the annuity rate will vary among individuals depending on a number of factors – for instance, if you want it to pay out for five years after you die, if you want a spouse’s pension built into it, your general health.

But for illustration purposes, we’ll assume a fund of €1 million will buy you an annuity income of about €35,000 in retirement and that everyone is targeting a €1 million fund at age 60.

Age start contributions: 25/35 /45

Contribution per year: €7,920/€15,947/€36,747

Total contributions made by age 60: €285,108/€414,635/€587,957

Total investment growth: €714,892/€585,365/€412,043

Fund size at age 60: €1,000,000/€1,000,000/€1,000,000

Assumes investment return of 6 per cent per year, takes no account of inflation