You might have heard the radio advert this morning for the European lottery; it posed a series of thoughts which were by definition looking at things from different perspectives; for example in one, the speaker was thinking that was a lovely few days off whereas the alternative thought was the wishful thinking of the speaker stating he couldn’t wait to have a few decades off!
Which got me thinking! A few decades off is an attractive thought after a long, leisurely bank holiday weekend! Especially if we assume we are looking forward to our retirement and finally being able to put into action all those exciting plans we have; whether it be to take up that hobby or visit that far flung destination we often dreamt of – but, and we have to ask this question; how on earth can we afford a few decades off? I’m going to be the glass half full person in the scenario depicted above and assume I will enjoy a long and healthy retirement. The only niggle then is being able to afford to do all the things I would like to do in my retirement!
George Hook did a piece last week on his Newstalk show (I have a long commute to work and listen to a lot of radio!) in which he interviewed a listener who wished to review his financial affairs (Newstalk were offering him the services of a Financial Advisor to do so after the programme). One of the main issues he spoke about on the programme was what he felt were the often held common misconceptions around retirement and pensions.
I thought it might be beneficial to discuss 5 myths about retirement and pensions as follows:
Myth #1: I won’t need as much money in retirement
We all think once the mortgage is paid off and the child care costs are eliminated, that we will feel quite rich! But there will still be the same bills to pay, a household to run perhaps 2 cars and all the same basic living expenses as we have now.
In any case wouldn’t it be nice to be able to use that money once used for child care and/or mortgage costs to spend on the nicer things in life, like being able to dine out and go on a holiday or two? If we limit ourselves to living costs, retirement will certainly not be an experience to look forward to and who wants that after a lifetime working?
A recent survey by Irish Life found only 29% of those surveyed knew how much they would need to live on in retirement. It is difficult but that is where your financial adviser can help.
Myth #2: I pay little or no tax in Retirement
A very common misconception held is that tax is simply not applicable in retirement. However retirement income is still taxed according to each person’s relevant income bracket (there are some exceptions). Many will move to a lower tax bracket, but this may not always be the case.
Ongoing retirement planning with your Financial Adviser can assist in calculating taxation on your pension pot and how to plan accordingly pre and post retirement.
Myth #3: It’s too late to plan for my pension
It is true that the sooner you start, the sooner you can build a healthy pension pot (assuming ongoing contributions). However the tax relief on pension contributions from your salary, actually improves the older you get, so there is an attractive incentive to start contributing to pension, no matter what age.
Myth #4: My house is my pension
But where are you going to live? Downsizing might seem like a good idea when you’re 40 but might not be an option for a variety of reasons when you are 65. By then you might simply want to stay in your family home or pass it on to your own family. It might not be worth what you had hoped it would be. Who wants to be forced to make that choice in order to enjoy retirement?
Sometimes people invest in a rental investment property which they deem their pension. However by investing in a property you miss out on the tax benefits of investing through pension. The rent will be subject to income tax and when selling the property, capital gains tax will apply.
You can actually purchase a property through your pension (called a Self Directed Pension Plan). In this way you can avail of generous tax reliefs and the returns are free from income tax and capital gains tax. Again, a good Financial Adviser can advise.
Myth #5: The Government will pay my Pension
Likely the biggest mistake of all is our assumption that we will all receive a weekly pension in our retirement. The State Pension is good in Ireland (at a maximum individual rate of €233.30 per week) but is it sustainable?
In recent years even, there have been substantial changes in this regard. All Employees born in 1960 or later have lost 3 years of contributory old age pension as the state pension age is now 68. Do you want to work until you are 65?
The Irish Association of Pension Funds Benefits Conference 2015 stated that the current pension is not sustainable.
Whilst it would be hard to envisage the abolition of the state pension scheme, at the very least it will be reduced dramatically. This is a harsh reality and one which we all have to wake up too. We all need to make up the shortfall with our own private pensions planning.