If there’s any good economic news from the last year, it’s the recent announcement from the Central Statistics Office (CSO) that the majority of workers in Ireland still have a pension. 50 per cent of women and 56 per cent of men have opted to get a pension plan rather than relying on a state bail-out when they reach retirement. Whether scared by reports that the government has taken a two-year ‘holiday’ from paying into the National Pensions Reserve Fund (NPRF) or the fact that, by 2050, there’ll only be two people in the workforce for every person over 65 counting on their taxes to live, most of us are spooked enough to set aside something for our retirement.
The bad news, of course, is that this still leaves 50 per cent of working women and 44 per cent of men stuck banking on the hope that public money can tide them over in old age. Judging by the responses we’ve received to last month’s article by Ian Mitchell (You & Your Money, September ’08) on the importance of sorting out a pension, we’re guessing that the majority of these people don’t want to be in that position. But building up a pension (or any goal that calls on you to set aside a million euro or even more over the course of your working life) is a pretty daunting prospect. Once you break it down into simple steps, though, making a long-term investment in your future is much simpler than it looks. That’s why we’ve put together a step-by-step guide to help you get started.
Start with the boss
“By law, an employer is obliged to provide you with access to a pension plan or Personal Retirement Savings Account (PRSA),” says David Malone of the Pensions Board. That’s why the board recommends that people looking to take the first steps in providing for their retirement talk initially with their employer. Many larger companies will operate a pension fund (some contribute to it along with their employees) and most outfits will have a designated advisor for staff to discuss setting up a pension. Not all of them are great about publicising it, though! That’s why you have to make the first move: ask your boss about whether the company has a pension plan, whether they make contributions to it, and when you can sit down with any designated advisor.
If you’re not working, or are self-employed, that doesn’t mean you can’t set up a pension either – PRSAs have been established to allow non-PAYE workers to make provision for their retirement, and employees can also use a PRSA if their company doesn’t have a designated plan. If you haven’t been put in touch with one by your employer, ask friends and colleagues where you can find a good (ideally independent) financial advisor. Once you’ve done that, it’s time to start asking the serious questions.
The first meeting
Siobhan Gannon, general manager of Quinn Life Direct, suggests a sensible first question to put to an advisor even before you sit down with them: “Are you an independent financial advisor, multi-agency intermediary or tied agent?” If an advisor is a tied agent or a multi-agency intermediary, you should bear in mind that they can only advise on the pension products sold by the companies they deal with. This means that, if none of the investment options put to you seem attractive, you may simply need to find another advisor!
Before that first meeting, it’s also a good idea to do your homework. “So much information is now available in the marketplace and online comparing between providers and products,” says David Malone. A few hours of research online – particularly a look at the Pensions Board’s handy guides, available at www.pensionsboard.ie - will make that initial meeting altogether more fruitful. Once you have a grasp of the products that are out there, Malone adds, it’s like buying any other long-term asset: “If you’re going to buy a car, you want to know how much its initial costs are and how much it’s going to cost to run.” Similarly, when an advisor is outlining a pension product that they’d recommend, you should find out about the once-off charges that are laid on the money you invest, ongoing management charges, and the kind of return that you can expect.
An advisor should tell you this – and more – by law, says Gannon: “All pension advisors are required to provide an illustration of projected growth and a reduction in yield calculation which show the impact of charges on the particular investment. Customers should be satisfied that they are clear on the amount of both the investment manager’s charges and the pension advisor’s charges. Customers should also make sure that they understand any guaranteed performance offered, the risk profile and term of the investment, and any penalties on transferring to another provider.”
Before making a commitment, you should also be provided with documentation that backs up what an advisor has told you – be sure to hang on to it, and make sure that the questions you have about a pension product or an investment have been answered. “If in doubt,” Gannon adds, “ask the pensions advisor to write down any clarifications received.”
Keeping an eye out
Even after you’ve done the hard part and committed to setting aside a portion of your income every month, that doesn’t mean you can forget about it. “Your pension is a valuable asset, and you need to treat it in the same way as your car or your house,” says Malone. “You need to check it at least once a year and make sure your statements are in line with what was proposed. As people get older,” he adds, “they need to look at its adequacy, and ensure that their contributions will meet their retirement.” If there’s anything that seems odd, Malone continues, always ask questions of your advisor or the trustees for a company-run scheme. They’re legally obliged to run a pension scheme in your best interests, and you’re entitled to know about the strategies they’re pursuing – after all, it is your money. While there’s no point losing your head over a short-term dip or less-successful patch in a long-term investment, asking an advisor the worried questions that bubble up in your mind while reading the pension statement should give you much more piece of mind.
Pull-quote: Your pension is a valuable asset, and you need to treat it in the same way as your car or your house.
Panel: Pensions: why bother?
On the face of it, a pension may look like an unnecessary hassle. “Why pay lots of money in charges?” and “why not just stash my cash in a high-performance deposit account?” are both legitimate questions. Of course, there’s one overriding benefit to a pension that these arguments miss: beating the taxman.
The contributions you make towards a pension scheme (up to generous maximums) benefit from tax relief at the highest rate of tax that you pay. This means that, if you contribute €100 per week to your pension and you pay tax at the higher rate of 41 per cent, the cost to you is effectively only €59 per week. If you pay tax at the lower rate of 20 per cent, the net cost to you works out at €80 per week. Contributions are also relieved from PRSI and the Health Levy if you pay these charges. This relief means that, even before your investment makes any money, you’re already up by a significant amount of cash.
