Starting a pension may be the natural first step on your journey towards a comfortable retirement. However, changes in the pensions landscape means the onus will be much more on you – not your employer nor the State – to ensure that the plan you set up eventually meets your financial needs and goals.
Needless to say, how you structure your pension plan and how much you pay into it depends on what age you are and whether you’re employed or self-employed. The inherent complexity of the pensions system in Ireland, however, means you will need to do a bit of homework or talk to an adviser to familiarise yourself with all the options and make the right choices.
If you are starting an employer plan today, for instance, the chances are it will be a defined contribution rather than a defined benefit/final salary plan. This means you are ultimately in charge of how your contributions are invested, how much risk you take and how your savings are used at retirement.
However, Alastair Byrne, senior defined contribution investment strategist at State Street Global Advisors, believes that while greater financial awareness about pensions is a good thing, such changes in the weighting of responsibilities for retirement planning “also introduce considerable challenges, with the majority of people unable or unwilling to engage in complex financial decision-making”.
Not everyone can afford financial advice, he says. “We find that the majority of members continue to look to trusted entities such as their employer for guidance, rather than making their own decisions. So smart, intuitive default options are essential,” Byrne says.
Colm Power, financial planning manager at Davy, says proposals by the Pensions Council to reform and simplify the pensions system should start to emerge in the next year or so.
“The hope is that the measures taken will help remove the layers of complexity which only serve to confuse people and discourage them from engaging with retirement savings plans,” he says.
Savings plan
Power acknowledges that taking responsibility and managing your own retirement assets is difficult enough, but he advises people not to get too caught up in how things might change and just stay focused on your own plans.
“It is important to help people take a step back and focus on the endpoint: what they are ultimately trying to achieve?” he says. “How much will I need to do the things I’d like to do in retirement? How much will I need to have saved to allow me to do that? When will I need it? That’s the first step in a pension plan.
“The next step is to build a savings plan to get you there and not to allow the complexity and noise around pensions distract you from the goal.”
If you have set up a pension some time ago, the biggest question is likely to be whether you are currently saving enough. State Street’s most recent annual report on global retirement trends showed that 39 per cent of Irish defined contribution savers are not confident they are on track to meet their retirement goals.
“Some people refer to a rule of thumb where you should save ‘half your age’, as a percentage of your salary, based on when you start saving,” says Byrne. “So, if you join the pension plan at 20, saving 10 per cent a year can be enough, if you delay until 40, you’ll need to save 20 per cent a year to catch up.
“If you make it easy for yourself by automating increases you can then forget about it; many employers will help facilitate this ‘auto-escalation’.”
Company scheme
If you’re part of a company scheme, you may have the option of making additional voluntary contributions (AVCs), which you can also do through a personal retirement savings account (PRSA).
“An AVC PRSA can provide an occupational scheme member with much greater investment flexibility than the main scheme, and the ability to seek advice,” says Power. “However, you should ensure the investment option makes sense. The costs involved may also be higher than in the main scheme.”
Ultimately, the best way to find out if you are saving enough is by sitting down and working through a financial plan, he says. “This is something that an adviser can provide which looks at how much you need to pay for your retirement and whether or not you are currently on track.”
Another emerging dimension to pension planning – at least while interest rates continue to be so low – is that annuities are expensive. But you don’t have to spend all your pension pot on an annuity; you can continue to invest a portion of your fund in a vehicle such as an advanced retirement fund (ARF) rather than lock yourself into a guaranteed income that might be less than you expected.
“This option of investing through retirement hasn’t been available to most people for very long,” says Power. “It was only extended to the wider membership of defined contribution schemes in 2011 and a change brought in this summer made it more straightforward for members of defined benefit schemes forced to take a transfer from the scheme to avail of the option to invest their assets in retirement. Before this they were forced to buy an annuity with their retirement assets.”
What about the self employed?
Difficult as it might be, everyone should try to find out if they are getting value from their pension scheme, but self-employed people should be particularly concerned about making sure this is the case.
“Employees often get the benefit of contributions by their employer to their pensions,” says Colm Power of Davy. “The self-employed don’t get this benefit, so need to work twice as hard themselves to fund their retirement pot.”
Without the safety net of a company plan, putting a pension in place can seem daunting and complex, according to Alastair Byrne, senior defined contribution investment strategist at State Street Global Advisors. “It is important they utilise the tax benefits as much as possible and, with lower-sized funds than a typical group pension scheme, ensure they are getting value for money.”
Power says most self-employed people will be funding through individual schemes so awareness of all the costs involves is crucial.
“These are frequently not fully disclosed to investors or buried in T&Cs,” he says. “It’s only once you have a clear understanding of costs that fair judgments in relation to value can be made.”