I re-tweeted the start of an Article published in the Irish Times last week by David Begg who quoted the great American playwright Tennessee Williams who once said “You can be young without money but you can’t be old without it.”
I must say this really resonated with me. I’m sure I’m not alone in being able to recall great memories of a lengthy holiday in some far flung destination, for what an average 2 week family holiday would cost now! My own personal favourite was a 3 month holiday throughout a vast portion of Australia; the fact that we were mostly in a 2 man tent (3 of us!) with the odd luxury hostel (not hotel!) thrown in did deter us in the least! It was an amazing experience. But the experience of our 20’s will not be what we want in our retirement which is now after all nearer to our 70’s than the 60’s!
So I wholeheartedly agree with the quote above. And on a serious note, it does not just relate to the nice things in life, like our travels but in our older age, we have those responsibilities we did not have, we have all the responsibilities and financial obligations that come with living in a home and possibly caring for other people (both young & old). We cannot survive on the shoestring budget we once could!
David Begg who is chairman of the Pensions Board went on in his article to discuss the proposals for reform published by the Pensions Authority last week in the form of a consultation paper. The Minister for Social Protection said he is likely to introduce an auto-enrolment scheme to provide for an income-related universal supplement to the State pension.
Pension Reform is badly needed in Ireland; as per the recent Irish Association of Pension Funds – Benefits Conference the following finds were highlighted;
• The Current State pension is currently not sustainable
• The State pension needs to reduce by a further 35% to become sustainable
• If the State pension is reduced by 35% then the number of working households at risk increases
from 29% to 52%
This coupled with the fact that less than half the population have any kind of pensions provision, highlights the need for major pension reform. In May, the CSO published statistics indicating only 47 per cent of people in employment have pension coverage.
David Begg argues in his article that State intervention is necessary and the Minister’s announcement about auto-enrolment is welcome. He does go on to say “That said, thought needs to be given about how to implement it without putting additional burdens on people and to whether to allow an opt-out or make participation mandatory. I favour the latter as the only way to ensure people start to save early enough to have a realistic prospect of a comfortable retirement”.
So why is there a need to look at this option? Why do not take responsibility for our own retirement funds?
I think there are a multitude of reasons, not least the financial ability to make pensions contributions, particularly when we have just emerged from a recession, and the vast majority of young people, who would traditionally have started looking seriously at pensions in their 30’s, simply cannot afford to do so, many caught with sizeable mortgages and high childcare costs.
Pensions I can only imagine, are last on a list of financial priorities, as at the very least the emergency fund and the education fund will all no doubt come first.
Pensions are boring & difficult to understand. The very fact that the money is ‘locked away’ for so long is off putting as there is no means of access should it become necessary.
And in many cases, we simply do not get around to setting one up early enough. If we really focused on the pension tax relief available, I feel pensions plans would be taken out in larger numbers.
We all remember the success that was the SSIA Government Savings Scheme (invest €4 and the Government added a €1). Simple and to the point.
However, the basics of tax relief on pensions can be simple, too.
Simply put, pension tax relief makes it more attractive to save for your retirement by giving you generous tax breaks on the money you invest in your pension. Essentially, your tax relief is provided in three phases;
• Tax relief on contributions
• Tax relief on investment return
• Tax free lump sum at retirement
For the purpose of this blog, given that I feel it is important to promote the fact that we should all take responsibility for our own pensions pots, before it really does become mandatory, I will just focus on the tax relief on contributions today; simply put, as a higher rate tax payer if you contribute €100 to your pension, due to tax relief available of 40% it costs you only €60.
If you put a Single Premium of €10,000 into your pension, as a higher rate tax payer the net cost to you after tax relief is €6,000!
If we consider this for a moment; if we invested the sum of €6,000 – how long do you think it would take this sum to grow to the sum of €10,000? The answer is that if we assume a net return of 2.25% compounded return, it would take 21 years!
If you were to invest the sum of €6,000 into your pension, you would achieve this instantly!
This is a startling reminder of the power of pension planning and the tax efficiency of same; not only are you planning your future you are doing so in an extremely tax efficient manner and making your hard earned money work for you.
Having said that, for most of us lump sums of this sum are not realistic, but regular pension payments are. More to the point they are tax efficient and necessary if we wish to have surety of income in our retirement.
And certainly necessary if we don’t want to do Australia in our retirement in a tent!
We will wait and see the form the pension’s reform will take and will certainly keep you updated on this blog. In any case funding for retirement is necessary for us all, once we can afford to do it.
This is an opinion only and does not constitute advice as individual circumstances will determine all financial advise given.