Real Talk 6th August 2021 by Megan Roantree

Pensions 101: Here’s Everything You Need To Know

They're not cool or sexy, but are they necessary?

Many of us don’t like to think about getting older. Though it’s a privilege, with it comes all sorts of responsibilities and plans about what the later stage of our life is going to look like. One way that people future proof or make retirement more secure is with a pension. We might think it’s tomorrow’s problem, and something we’re too young to deal with, but understanding how to do it, the benefits involved, and whether to go for one or not, is no bad thing. Totally confused about pensions? Think you’re too young, or even old to be doing it right now, or at all? Anne Marie Macken from Money Coaching Ireland stresses that knowledge is power when it comes to pensions and whether you want or need one.

She explains that if you’re even curious about a pension, your first step should be to check with your employer.

“If they offer a scheme, it’s usually better to opt in than to go it alone. The fees are likely to be lower, or your employer may pay them. Some employers will even make matched contributions, which means for every euro you pay into your pension, your employer will match it up to a certain limit.”

She adds: “Not all employers will provide company pension schemes, but if they don’t, they must ensure that their employees have access to at least one Standard Personal Retirement Savings Account (PRSA) through an approved provider. It’s always good to check with them what arrangements are in place. So you can make an appointment with the PRSA representative and then decide what’s best for you. The pensions authority website is also good for understanding what kind of options are out there and to ensure that you are as informed as possible.” 

Some people prefer to have a savings account that they consider a retirement fund or look at as money for later in life, if your savings account is solely for this reason, then the money expert stresses it’s wise to do it through a pension instead. “You’re missing out on all the tax benefits if you just have a savings account. Pensions have a 3-way tax benefit whereby, subject to certain Revenue approved limits, you get income tax relief on the money you put in, you get tax free growth on the funds and then you get a tax-free lump sum on retirement.

If you’re just saving away in the bank or credit union, you don’t get that. Plus, you’re making little or no interest on your savings and for a long-term goal like retirement. I’ve encountered people who didn’t do anything about a pension for years, yet were saving money for retirement.When they went to their employer they realised they had a scheme but it was an opt-in, you weren’t automatically in it. They not only missed out on all the tax benefits but they also lost out on the matched contributions the employer would have made”

 

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So if you’re self-employed or you decide to go about it yourself, what do you do? “Again, the key is to get informed about your options,” says Anne Marie. “The pensions authority website is always a good starting point. Then you can talk to a financial advisor or broker, which could be in a traditional bank, large insurance company or a smaller independent broker or financial advisor. It’s important to consider the reputation, quality of service and the fees involved.

A 5% fee means that for every €100 you put in, it’s really only €95 for you, and some may describe it as an ‘allocation rate’ but a ‘95% allocation rate’ really means a 5% fee! Some brokers will charge set-up fees as well as ongoing charges so it is important to have the full picture and then decide.”

Another factor that might stop people is they may feel they don’t have enough money to put aside, so how much do we ideally need to contribute? “The pensions authority has a calculator, and you might say you want to live on €30k a year in retirement. The calculator might advise that you need to put in anywhere between €600 and €1,000 per month. You think ‘Wow, I can’t afford that!’ and you end up doing nothing. But in reality, anything is better than nothing so I would say the important thing is to start, even if it’s just €100 per month. Then you may get a raise or realise that you can up it to €200 and go from there. In general, a good target would be 10% of your income, particularly, if your employer is not making any contributions but that’s not always possible as everyone’s circumstances are unique.” 

If you do set up a pension plan, it’s important to understand that with investment comes risk and understanding where your money is going is crucial, says Anne Marie.

“It’s your money and you need to be comfortable with how it’s invested and how it’s performing. Don’t just throw your statements in the bin or fail to ever look at them online.Take an interest in how it’s managed and make sure you’re happy with it.” 

Regardless of whether you set up your own, you’ll get a state pension from the government, so it’s about deciding whether that’s enough for you. The amount depends on your PRSI contributions, and if you have insufficient total contributions, you may be entitled to a means tested state (non-contributory) pension. The most you can expect from this pension is €248 per week or just under €13k a year. So, it’s about deciding whether that’s enough for you or whether you are willing to rely on that being there when you come to retire. 

Of course, there are many factors in our changing world to consider, one of them is that some people may never have a mortgage and instead continue to rent later in life. “If you have to pay rent you have to look at how you’re going to survive on the state pension.Traditionally people would arrive at retirement and have the mortgage on their home paid off but that’s not necessarily the case anymore,” Anne Marie adds.

Other factors include our considerably longer life expectancy and our recent transition to working from home, which could allow people to work for longer if they wish. “Years ago, many people retired at 65 and often did not survive beyond 70. Now you might be living until 95 or 100, and who knows in 40 years-time what the life expectancy will be.

People might enjoy work and even if they retire from their full-time career job, they may continue to do part time or consultancy work and supplement their income that way. They may also have other sources of income in retirement such as from inheritance or from asset sales, like downsizing their home. I would encourage people not to be anxious or nervous about retirement but it’s about not burying your head in the sand. It’s about making a conscious decision, “no, a pension is not for me” or “it’s not for me right now but I’ll review it in the future”.

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