‘A pension is for life, not just for October’

It doesn’t matter how many times we are reminded of the importance of starting a pension plan early, getting off the fence is, for many, one of the most difficult and “grown-up” things life throws at us.

But being informed takes a lot of the fear and uncertainty out of what is one of the most important life decisions. Here, some of the top pensions experts in the country give advice to those thinking about planning for the future.

Alistair Byrne, Senior DC investment Strategist, State Street Global Advisors

Start saving into a plan as early as you can in your career and think about how much you need to save to get the retirement income you need. Will your employer match any contributions you make and can you save enough to take full advantage of the matching on offer? There are considerable advantages to starting early: some people refer to a rule of thumb where you should save “half your age” based on when you start saving. So if you join the pension plan at 20, saving 10 per cent a year can be enough. If you delay it until 40, you’ll need to save 20 per cent a year to catch up.

The biggest mistake is to put off saving until ‘tomorrow’. Many people delay taking action and it can have a big impact on retirement income. Inertia means people can delay for years. The UK has started using automatic enrolment as a means of overcoming inertia. Employees who reach age 22 or who move jobs are automatically enrolled in the pension plan. They can opt out if they want, but on average 90 per cent stay in and many are grateful that the decision has been taken for them.

In Ireland the responsibility is with the individual. But choosing to work with a good pensions planner can make the process less daunting. People do struggle when choosing a financial adviser. Many though trust their employer. So if there is a company pension plan, a good first step is joining that and taking advantage of any company contributions. Typically, there will be a default fund, so the individual will not need to make any investment decisions if they don’t want to.

Maura Howe, Assistant Head of Operations and Communications, The Pensions Authority

In 2015, the average person retiring at 66 still has a life expectancy of 20-23 years. That's a long time, from a retirement perspective. Under the Social Welfare and Pensions Act 2011, the qualifying age for the State pension has been raised. Since January 2014, the standard State pension age is 66 years. This will increase to 67 in 2021 and then to 68 in 2028. To help calculate the figures, check out the pensions calculator at pensionsauthority.ie.

Keeping an up to-date pensions file is important. Most pension plan providers are obliged to provide you with certain information on your pension scheme, so it is worth starting a pension folder too. Once you have read the yearly pension benefit statement and annual report, you should keep it on file.

If for any reason you don’t receive information on your pension scheme or personal pension – or more commonly where you do receive the information but don’t understand it – contact those looking after your pension. This could be trustees, a pension provider or financial adviser.

Remember, if in doubt, ask as many questions as you want and insist that your pension information be explained in plain language.

While you may have an expert financial adviser looking after things, you should still be clear as to how your pension savings are being invested, the type of strategy being used and the level of risk involved. Check out the Investment: Risk and Reward details in the Understanding your Pension section of the Pension Authority's website, pensionsauthority.ie.

Tax relief is another key area. The Government supports anyone saving for their retirement by providing income tax relief on contributions at your highest rate of tax. Understanding the tax relief benefits will help you to check that you’re getting the relevant tax relief.

In advance of retirement you should be thinking about the type and level of pension fund you have built up and the choices that will be available to you.

For many people their pension fund on retirement may be the largest asset they will ever need to make decisions about. Most people may have a number of options to choose from, depending on their fund and so as to make the transition into retirement easier it is worthwhile doing the research well in advance. Speak to the trustees, your employer, colleagues or financial adviser.

Colm Power, Senior Financial Planning Specialist, Davy 

For starters, having a solid, well-researched retirement plan is the single most important thing you need to do.

We are more likely to achieve objectives that have been clearly outlined from the get go. Ultimately, it’s about taking responsibility. There are some hard decisions to be made, not to mention a lot of information to get through in order to do it right. It can be a bit bamboozling at times, but the reality is you have to engage in the process and put a plan in place.

Start by asking yourself: “Why am I doing this in the first place?” Then come up with the most appropriate investment strategy. This requires spending time doing research before starting any pension contributions. A pension plan is different for each person. It’s interactive and will depend on an individual’s age and capacity to take risk. The younger you start, the more volatility you can accept. But in reality everyone – regardless of age – needs to be mentally prepared for some volatility.

“The biggest mistake when planning for the future is “under-saving”. People tend to under appreciate the level of savings required. The fact is two or three per cent of your salary isn’t going to cut it. It needs to be 10-15 per cent, consistently saved every year. Life expectancy is getting longer and longer.

Peter Feighan, Senior Financial Planning Consultant, Davy 

It’s important to read the terms and conditions clearly of any pension plan before signing. You are about to sign a contract with a company who will assist in one life’s most important decisions. It’s crucial you understand the key features of the document.

Some try to start saving without seeking independent advice to cut down on initial costs. But expert advice is worth paying for if you want to guarantee getting the right product. Having a good adviser – who is available when they’re needed – is important. They will provide guidance in times of uncertainty, particularly important for individuals with little previous financial experience. You want someone who has surveyed the markets and who knows all about appropriate structures.

The affordability of contributions is also critical. Agree to pay a minimum but make sure there is the flexibility in any plan to increase or decrease contributions when needed.

The cost of the plan is also important. There are some standard fees that various providers will charge: charges on contributions coming in, annual management fees, etc.

When assessing charges, check to see if there are clauses or penalties for switching providers for any reason. There typically is in the case of life assurance.

In years one to five, in many cases there will be some kind of lock in. After that, it’s important to have the flexibility to switch providers at a later stage if you see fit.

Jim Connolly, Head of Pensions, Standard Life

Some investors tend to rush into pension investments at this time of year because of the looming tax deadline. Very often these contracts don’t get revisited until they mature.

This is particularly common among self-employed individuals who top up their pensions at this time of year simply because their tax advisers tell them it’s a tax efficient thing to do. The majority will leave it to the last minute. October 31st is the return filing date, so they have to make a contribution before that date. (Our busiest time of the year is that week.)

The reality is that people rush in, make eleventh hour contributions (which can be significant), mop their brow and forget about it until the same time next year. But this investment is far more than a simple tax break. It’s a major investment. A pension is for life, not just October. And you should invest time looking after it – you can actually exert far more control over it than most people think. Your pension fund can be invested in anything from coffee beans to pork bellies. Despite people’s best intentions – “ I’ll just make the contribution now and sort out the investment later” – the truth is that the next time they think about it is the following year when their adviser reminds them to make that year’s contribution.