Take long-term view on pension when planning for retirement

Building a pension pot is a long-term game. For example, a person with an income of €60,000 who wants to earn €30,000 in retirement – excluding the State pension – needs to be thinking of terms of a fund with a value of about €700,000. To achieve that would require contributions in excess of 10 per cent of their income over the course of an average career. The earlier you start, the easier it gets.

Pensions calculators such as those at the Pensions Authority website (pensionsauthority.ie) as well as those provided online by a variety of financial institutions are useful tools that allow you to input your age, current contribution levels, desired retirement date and can show you how much annual pension income you can expect.

They also provide something of a wake-up call for those who have been complacent about savings.

“There’s an element of wake up and smell the roses here,” says Jim Connolly of Standard Life.

“People need to take on board that there will come a day when they won’t be able to work. They need to view their requirements in the round. A retirement pot is an amalgamation of assets including property, inheritance and investments and everyone needs to figure out what their magic number is in terms of what they will need to live on post-retirement. If there’s a gap, that needs to be addressed.”

While Connolly acknowledges pensions have had a bad press lately in terms of Government restrictions and levies, he says reverse psychology should apply and people should see this as an endorsement of the power of pensions.

“Despite recent moves, with 41 per cent tax relief still available, pensions remain singularly the most tax-efficient way of saving bar none,” he says.

Pension funds have also performed exceptionally well in recent years, following a barren few years at the end of the noughties.

“Anyone who has been contributing to a typical managed fund lately has been doing very nicely. Managed funds are up by around 10 per cent year to date and the 10-year average performance of funds has risen very respectable 6 per cent per annum,” says Munro O’Dwyer of PricewaterhouseCoopers.

O’Dwyer says pensions work for those who take a longer- term view and who do not take fright when equity markets fall.

“You have to be very clear in your strategy and be prepared for volatile periods, as equities are a key part of even a conservatively profiled investment.

“The worst thing that you can do is to over-react to poor performance in the sell out when the market is falling,” he says.