Talk of mandatory workplace pensions and bear markets raises the question of how much pension savings people need to have in place when they retire.
The figure will vary according to individual circumstances but as a general rule the simple answer is: more than you think.
This is important in the context of the ongoing debate about auto-enrolment – where the Government plans to gently push everyone over the age of 23 and younger than 60 into a private workplace pension if they earn more than €20,000 a year.
The legislation underpinning the move is working its way through the Oireachtas, though there are concerns about some of its proposals.
Employers group Ibec this week argued that its planned introduction in 2024 was too precipitous.
As it happens, despite the confident pledges of the relevant Minister, there seems to be no chance of auto-enrolment being in place by next year. Even if this government and the next remain fully committed, it could be years before mandatory pensions are a reality in Ireland. On that basis, those employers not already providing pension schemes – which I would argue they should be doing anyway – will have more than enough time to get organised.
[ Ibec calls for delay in workplace pension auto-enrolmentOpens in new window ]
And even when auto-enrolment does arrive, on current plans it will take a further decade before contributions will hit the target level of 14 per cent – 6 per cent from the worker, a matching 6 per cent from the employer and 2 per cent from the State.
That Ibec thinks this is too hasty makes you wonder about their stated support for adequate retirement planning for their employees, where just over a third of private sector workers are members of occupational schemes.
And this brings us back to how much you need in your pension.
If you are a low-paid worker, it’s possible the State pension will be enough. Most advisers will suggest that a person should aim for a pension that delivers 50 per cent or more of their pre-retirement earnings. With the State pension amounting to €13,795 from this month (€265.30 a week), that suggests it might be adequate for anyone earning up to about €27,600.
But if you are on the average industrial wage – just shy of €45,000 – that will leave you with less than a third of your workplace income and likely facing very constrained financial circumstances on retirement.
For most of us, enjoying a retirement that does not involve consistent hard financial choices means investing in our future. And clearly the later you start saving for retirement, the more it is going to cost you annually.
[ Women look to be on the wrong side of auto-enrolment pension provisionOpens in new window ]
Take a person earning €33,000 and looking for a 50 per cent pension. A calculator offered by the Irish regulator, the Pensions Authority, says you will need to pay 6.8 per cent of your gross salary into a pension from now if you are aged 25.
However, if you are five years older – 30 – and only now starting a pension, you’ll need to be putting 8.2 per cent of your gross earnings in to hit your target, a figure that rises above 10 per cent if you are 35.
Irish governments have been talking about auto-enrolment for the guts of 20 years, and even now, when the current administration is fully committed, it could be another two or three years before it becomes reality. And that depends on whatever government is in place after the next election continuing with current policy.
Even then it’ll be a decade before contributions are at what is considered by the pensions industry to be a broadly reasonable level.
The 65 per cent of Irish private sector workers with no occupational pension – especially those paying tax at the higher rate – might be well-advised not to wait but to get started now on saving for retirement.
The issue of pension adequacy is also tied up in concerns about the sustainability of the State pension. Currently €265.30 since the start of this month, a political decision was made recently in Ireland that the pension would continue to be paid out from the age of 66 despite widespread concerns that demographics will make this unsustainable in the future.
In Britain they are talking about bringing forward the date at which the state pension age rises to 68 by a decade, to about 2034 or 2035. Although this has yet to be confirmed, it has already raised a chorus of objections with people insisting they have already paid for their retirement in the social insurance (National Insurance/PRSI) payments they have made over their working lives.
Not so – at least for the average worker. UK workers pay about 7.5 per cent social insurance at the current level of average earnings – £33,000 – or just over £185 a week. Even assuming they had paid this amount throughout their working lives, they would effectively have “funded” their retirement for a decade. That’s well shy of the 17.5 years an average man living in the UK and aged 66 can expect to live. And that figure rises to 20 years for a woman.
Including employers’ social insurance will certainly make up the gap but that’s stretching the concept of the worker’s social insurance payments.
In Ireland, where the pension is higher (€265.30 a week compared with £185.15, or €209.43 in euro terms), the social insurance contribution rate is lower (4 per cent versus 7.4 per cent at the average earnings point) and life expectancy is broadly the same, so the gap is more extreme if calculated on the same basis.
Even allowing for our higher average earnings – €44,944 a year compared with £33,000 (€37,327) – our PRSI contributions would only fund closer to five years of State pension in this somewhat artificial scenario.
This dilemma is not going away.
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