Pensions should be simple. You save money in a tax exempt fund over many years, benefiting from tax relief on contributions and tax-free growth. Theoretically the money you save should also grow although any growth is clearly dependent on the fund(s) you choose to invest into and the costs associated with same. At normal retirement age (anytime after 60) having saved a large pot of money (ideally many multiples of your then salary), you take a portion of the fund as a tax free lump sum and the balance provides you with an income to live the rest of your days in relative comfort. So what's complicated about that?
Firstly, it's very difficult to save sufficient money over enough years in a pension due to the never-ending cash flow pressures elsewhere in your life. The more years you can spread your contributions over the less you need to fund each year. However, due to the inconsistent nature of peoples employment circumstances, remuneration and financial pressures this typically proves very challenging. Most people fail to appreciate that a pension is not some magical device from which you can derive great benefits having contributed very little.
The size of the 'pot' clearly dictates how good the income it can provide so a €1 million pot will deliver twice the benefits of a €500k pot. So what are the factors which affect the size of the pot? The principal one is how much money you contribute, with a second less predictable factor being what growth or losses your fund achieves along the way. This will be determined by investment performance and also the effect of charges. If we ignore growth for a moment, and assume that your pension pot at retirement will contain everything you have contributed to it along the way, just how large a pot should you aim to accumulate?
The answer to that question depends on when you intend to retire and what % of your then salary you would like to receive in retirement. So if you would like to retire at 65 with approximately 50% of your then salary for example and the average person lives to 80, you would need a fund capable of sustaining you at 50% of salary for 15 years, i.e. 7.5 years salary (ignoring growth). That's a tall order for a typical person who might contribute to their pension over 30 years. Do the sums, 7.5 years salary divided by 30 = 25%.
So ignoring growth a person would need to contribute 25% of their salary every year for 30 years to accumulate a fund of 7.5 times their final salary. Even allowing for the fact they get tax relief on these contributions it's still a very big ask. The above illustration is a simplification but it shows you the concept.
So should you just give up and not bother with a pension? No, because the alternative is worse. The alternative is being dependent on the state to provide for you, which when you consider the demographic trend of people living longer and having less children, the ruinous state of government finances and the pushing back of retirement ages the state is unlikely to provide you with anything more than very basic financial support. It is a certainty that the real value of state pensions will fall in the years ahead as the money is just not there to prop everybody up. Therefore you may need to work for longer, possibly into your 70's.
However that's dependent on your health and of course the availability of employment. As with everything in life, you need to hedge your bets rather than rely on an uncertain outcome. Pensions make sense primarily because of the tax relief but even if there were no tax relief you'd still need to save for the future. Yes it is very difficult to fund a 'good' pension but remember even a mediocre pension is still far better than having no pension.
We can help you to plan your retirement funding. We will review your current pension in terms of it's performance, costs, the suitability of investment funds and associated risk to your circumstances and advise you on what you should be doing.
Types of Pensions
There are numerous different types of pension products in Ireland - Company (Executive) pensions, Personal pensions, PRSA's, AVC's, Self Administered (SSAP's), Self-Directed, Retirement (Buy-out) Bonds and then when you retire you can have ARF's, AMRF's, Annuities etc.
Transfer rules between the various types of pension vary and overall the situation is confusing and messy both for clients and also for the advisors. Again, we can help you tidy up your existing pensions, to ensure there is some logic to your investment choices and that you are maximising value for money.
While there are numerous Pension Providers operating in Ireland, essentially they all have to put together investment options from the same list of assets - Equities, Cash, Bonds, Property, Commodities etc. The 'best' or most suitable investment option will vary for each client depending on their circumstances, appetite or aversion to risk and as always when investing diversification is key to moderating risk.
Since the global downturn of recent years, investors have begun to consider the financial strength and security of their pension provider as a key determinant of which institution to do business with and as you would expect there has been a flight to quality as investors are understandably nervous about the 'weaker' financial institutions.
Since the global downturn many industry commentators question the effectiveness of 'managed funds' which have historically been the pension fund of choice for Irish investors. If we are now in an era where there will be little or no sustained stock market growth in the coming years, investors may need to consider more sophisticated options such as absolute return funds which take a more active strategy in trying to achieve returns not only when the market is rising but also when it is falling.
The Standard Life GARS fund is perhaps the best known of these funds in Ireland at present and aims to deliver cash + 5% return on a rolling three year basis. Ultimately there are investment options to suit all levels of risk whether you wish to choose shares yourself, invest in property, managed funds, china, india, gold or even cash.
What if you die before you retire? What happens to your pension? What about the urban myth that your pension dies with you? This is where advice comes in. We will advise you on how to structure your retirement planning with a safety net to protect against unforeseen circumstances so that you and your loved ones are best protected.