‘In the long run we’re all dead,” economist John Maynard Keynes famously proclaimed, and this, it seems, is what so many of us think about when it comes to pension planning. But failing to engage – and contribute – to your pension, may be a dangerous route to take.
“It is incredible the amount of complacency people have towards their pension fund; their interest only starts to peak as they get older,” says Martin O’Hora, financial planning manager with Goodbody Stockbrokers.
Of course by then you’ll have missed out on all the good work compound interest can do to boost your income in retirement.
For Jim Connolly, head of pensions with Standard Life, a good exercise to assess how much you’ll need to save is to work back from where you want to be when you’re retiring.
“If you want two holidays a year, presents for grandkids, club subscriptions, two cars, how much do you need as an income? Once you know that you can look at the various ways to do it.”
Start early, save more
It’s unlikely you’ll ever meet a pension adviser who doesn’t recommend starting early, and indeed it would be hard to agree with them if they did.
“You have to get involved but the problem we see, is that people only start getting involved as they get older, into their 50s/60s,” says John Groarke, pensions product manager with Irish Life Financial Services.
As Groarke notes, if you save €100 a month for 20 years, earning 5 per cent each year, your fund will be €41,000; but if you don’t start saving until 10 years to retirement you would have to save more than double (€260/month) to achieve the same fund.
“So clearly, if I start earlier, I can accumulate a significantly bigger pot with which to retire,” he says.
Get engaged
“You should be interested in it, you should know what fund it is invested in, you should know what pension pot you are targeting at retirement and you should be getting financial advice to help with these decisions,” says Groarke.
But for many of us this can seem like too much hard work – or too much money that we don’t have.
Given the changing State pension environment, however, this is even more important. Indeed a combination of an increasing life expectancy, with people now expected to live for 25-30 years in retirement, and changing demographics, which will see just three people working for every person in retirement by 2050, means that the onus is on individuals to be better prepared for retirement.
Already, the Irish Government, like others around the world, has started to push up the age of retirement. This year it moved up to 66, and by 2028 it will be at 68. And even when you do qualify for the State pension, you might find it insufficient.
“The state pension is less than €12,000 a year. You have to ask yourself, could I survive on this? What would be the impact on my lifestyle, my family, my house if my only income was €12,000 a year,” asks Groarke, who also questions whether in the future people will even be entitled to such a pension.
“It’s very hard to see how the State pension could be maintained, even at its current level,” he says.
The move to DC... and a longer working life
Another factor which means that people are increasingly forced to plan for their own retirement is the move away from so-called gold-plated defined benefit (DB) schemes towards defined contribution (DC) schemes, which allow employees to build up their own pension fund, often with contributions from their employer, in a ring-fenced structure. This means that if the company goes to the wall, each individual’s pension fund will be safe. The downside however, is that they are typically not as well funded as DB schemes.
“It’s a reality of life; the days where your employer sponsors your pension are fast diminishing,” says Connolly, noting that DB schemes have been exposed as being “only as valuable as the employer sponsoring it”.
Push people into pensions
Given the challenges ahead, there has been talk that Ireland may seek to emulate the success of countries such as Australia and the UK by introducing some form of auto-enrolment pension, which gives people the option of opting in or out (like the UK), or mandatory pension (like Australia).
Alastair Byrne, senior DC investment strategist with State Street Global Advisors in the UK, says that so far Nest (National Employment Savings Trust) has been working well.
“The UK experience is very positive. We’re seeing opt-out rates of much less than people had expected,” he says, adding that ahead of the introduction of the scheme it was thought that it could be as much as 30-40 per cent.
“But what we’re actually seeing among larger employers is opt-out rates of less than 10 per cent,” he says, adding that another heartening element of the experience so far is that just 5 per cent of people aged between 22 and 29 are opting out.
The next stage of the UK’s approach will be to get minimum contribution rates to rise further.
But whichever approach the Government here chooses, it needs to tread carefully, suggests O’Hora.
“If mandatory pensions are introduced it needs to be done very carefully. It can’t be seen as just another tax. People need to be given ownership and get involved,” he says.
Icebergs ahead?
As the experience of the recent past has shown us, there are always risks on the horizon for pension savers.
For O’Hora, the “biggest scandal” of the past few years has been the pensions levy, citing a recent client who discovered that he had €6,800 taken out of his fund this year through the levy.
“There has been a huge amount of publicity over water charges, but it’s incredible how much money they’ve taken out of people’s pension funds,” he says.
Another potential problem for savers is opting for the wrong type of investment, which isn’t suitable for either their age or risk appetite.
“One of the biggest issues is that people are in the wrong type of investment for their own investment appetite,” says Connolly.
The risk is something that pension-holders can manage themselves, however.
“The main risk is that people simply aren’t saving enough for retirement,” says Groarke.
Which matters more? Performance vs contributions
You can agonise over how to achieve the best return from your pension fund, but which is actually more important – the amount you put into your pension fund or the amount by which it grows?
John Groarke, pensions product manager with Irish Life Financial Services, offers an example which would seem to indicate the former.
Consider a pension fund with contributions of €100 a month for 20 years, earning 5 per cent investment return. This gives a final fund of just under €41,000. If the investment return had been 20 per cent higher, so 6 per cent instead of five, the final fund would have risen to just €45,600. But if the payment was 20 per cent higher, so €120, then your final fund would be almost €49,000.
“So the same percentage increase in your contribution has a much bigger impact on your fund at the end,” he says.
Indeed no amount of investment return will make up for low contributions.
Making and maintaining regular contributions will be the key driver to the size of your final pension pot, even though of course it is still important to keep a close eye on performance.
