There is a saying in the insurance industry that the difference between an old man and a retired gentleman is a decent pension. A bit old-fashioned, not to say patriarchal, but no less true for that.
Most of us on the career treadmill dream of a time when we can take vacations longer than a fortnight, ignore school and stay a week longer, or even put down deposit for an apartment in the sun. Others can’t wait to pay off the mortgage, welcome grandchildren and improve their golf handicap.
Whatever’s on your bucket list, one thing’s for sure: with less than $15,000 a year to live off your state pension, you’re not going to do any of it. Incidentally, this is the maximum for full PRSI contributions over an entire professional life.
With an average wage of around 46,000 euros, that’s like jumping off a cliff at 65. In fact, only those already living on welfare don’t have to worry about retirement. Your income increases when you retire. For everyone else, it should be a hot topic.
The term “pension time bomb” is overused. It refers to the staggering future costs of both the public sector and the state pension bill that are not only waiting for us but are already being paid.
We are lucky to be a prosperous first world country. It wasn’t 1950 when life expectancy was only 65 years. Today it is 82.8 and anyone born today can expect to live to be 100 years old. Socially it’s fantastic. But the financial consequences are devastating.
The social budget for 2023 is 23.4 billion euros. Most of the small change goes to the pensioners. To put the future in context, it was 425,000 in 2000, 673,000 in 2019 and will be spread across 1.6 million by the time today’s 30-year-olds get their bus pass.
It’s a good/bad news story, and while pensions are always paid out of the public coffers (it would be an enormously brave minister to cut them), something else has to be said. Either we delay payment or we pay less.
Only one in four working people is confident that they can retire comfortably
Politicians opted for the former, only to be undone by coalition shenanigans in government.
According to a study by the Bank of Ireland, which conducts pension pot seminars, only one in four working people is confident of being able to retire comfortably. 67 percent worry about how to afford it and only a third know what their current retirement will bring.
Prioritizing expenses during working life is important, and mortgages and kids usually win. But ignoring your future self is a mistake that is often not realized until it is too late.
From 2024, anyone aged 23 to 60 who earns more than €20,000 a year will automatically be included in a pension if they are not already on a pension. State and employers will supplement it by law. But make no mistake, for many it just won’t be enough.
As financial adviser Eoin McGee says, investing in an annuity is about “time, not timing”.
The biggest favor you can do your future self is to start early — quantity is less important. If you save $250 a month after age 45—a time when many people start thinking about retirement savings—at conservative growth rates, you’ll have saved $81,761. But start at 35 and your fund is €148,879 – that’s an extra €67,000 for a cost of just €30,000. Start at 25 and your fund is €243,188.
Yes, pensions are complicated financial packages. But essentially, they’re just speed savings. The money you put in is boosted by tax breaks – 100 euros costs a top taxpayer just 60 euros. That’s a 66 percent return on day one. The growth in the fund itself is tax-free and you get a portion – up to €200,000 – also tax-free at the other end. If you’re old enough to remember the hugely popular SSIA plans, this is a lot better.
Most of us don’t stay in the same job for 40 years. We have different jobs, portfolio careers. So you should combine your pension pots or keep them separate.
Combining pots has the benefit of a “single view” – all in one place. You could benefit from lower fees through economies of scale.
But there are conditions for transferring pensions from one place to another, and not all systems allow this. Switching may also incur exit fees, so independent advice is important.
Pensions laws are exceptionally strict in Ireland so keeping them all separate is not a problem. You can transfer most of it to a recognized pension fund (ARF) at 65 anyway, or simply have multiple income (plus state pension) flow into your account over the course of the month.
A voluntary additional contribution is the easiest way to top up a company pension plan. You can choose where it is invested, it is fenced off just for you and you can use it to top up the pension. It’s important to pay attention to the “gap” between what you have and what you need.
Below are more reasons why you should get started and how to get on top of this gap.
10 good reasons to finance a pension
1. It’s an investment in your future self.
2. Nobody cares more about your pension than you. All the government will do is keep you off the subsistence level.
3. There’s simply no other investment vehicle that can compete with the tax break.
4. There are three tax benefits: your contributions, fund growth, and the tax-free lump sum.
5. There’s no point in making plans to travel or live well after 65 unless you can afford it.
6. Anyone who doesn’t do it themselves will be forced to do it anyway from 2024.
7. Scheduling now means that as the time approaches, you can increase your cost to unlock it.
8th. There is a lot of great advice and resources that can help you.
9. You can expect to live almost as long in retirement as you did when you were in the workforce.
10 You can start dreaming about your life after work and how you want to live. Your retirement is simply the tool to make it come true.
What do you do next
Calculate how many paydays you have left. If you’re 45, it’s only 240.
How will you distribute your income?
Find out (through an agent or your company) what you already have, including previous domestic and foreign employment and state pension entitlements.
Calculate what you need (pensionsauthority.ie has a good calculator).
A finance broker will assess how best to bridge the gap and the likely cost.
https://www.independent.ie/business/personal-finance/the-world-wont-sort-out-your-pension-now-is-the-time-to-take-action-for-yourself-42086398.html The world won’t rule your retirement, now is the time to take action