Pensions: Complicated, boring and full of jargon. Does this sound familiar? You receive a statement from your pension provider once a year which you briefly scan without fully understanding it. It may as well have been written in another language.
As a financial adviser, I do think Pensions as a whole are unnecessarily complicated.
I have put together 6 of the biggest gripes on the subject and suggest ways you might consider making your plans for retirement simpler.
1.It’s impossible to know how much I will get when I retire
It might seem impossible to work out how much to contribute or what a pension will produce at retirement. According to Irish Life, only 29% of Irish people know what they will need at retirement. Often, it’s not that people don’t want to save, they don’t know what to save.
The pensions authority has a great pension calculator which shows you how much you need to save in order to reach your target for a comfortable retirement. Input your age, salary and intended retirement age, and what percentage salary you would like from your pension. There is also a facility to put in any existing pensions.
https://www.pensionsauthority.ie/en/Calculators/Pension_Calculator
2. My pension has done nothing over all this time
The two biggest factors that can affect the growth of a pension are charges and the actual fund performance. It is important to review the fund your investing in to make sure it’s performing but that it also matches your risk level. Lastly find out the charges on the fund. If the charges are too high, they will eat away at any returns you might have made over the last few years. Not all investments are the same. Poor performance can leave you underfunded in retirement.
The solution is easy – if you are unhappy with an investment in your pension, you should be able to switch into a new fund you think will perform better. If you can’t find another suitable fund with your existing provider, you might consider another pension which offers a wider range of funds.
Before transferring, please ensure you won’t lose any valuable guarantees or benefits or incur excessive exit fees.
3. It’s difficult to manage and takes up a lot of time
Managing your pension can be a hassle with small pots spread between different companies. This can commonly occur when we change jobs and leave our pension behind. Sometimes forgetting about them completely. An easy solution is to consolidate all your pensions under one roof. By consolidating you will receive one statement instead of loads of paperwork from numerous insurance providers. In this instance it’s important to talk to a financial adviser who will advise you appropriately.
4. The charges are too high – how can I possibly make money
Nobody likes high charges. This is especially true when you’re saving for retirement as they eat into the value of your pension fund and lead to a lower income when you stop working.
For example, if a 30-year-old saved €500 a month into a pension and has pension charges reduced from 1.5% to 1.25% (annual management charge) a year, based on growth rate of 5%, and 100% allocation, this would boost their pension fund from €333,008 to €348,181. This is one aspect of your retirement planning that you can control. Charges have a significant effect on your pension over time. Modern pensions in general have much lower costs than older pensions. Ask your own financial adviser what the charges are and ask for a second opinion if you think they’re too high.
5. My pension will die with me
This is not true – depending on the pension structures you have, you can ensure all, or part of your pension is passed to your beneficiaries when you die.
Company Pension
If you are a part of a company pension scheme (defined contribution or defined benefit) a lump sum of up to four times your salary may be paid to your estate, plus a refund of the value of your own personal contributions and AVCs. For the employer contribution’s a spouse pension must be purchased. This rule applies to active members of a pension scheme, for deferred members their spouse would receive the full value of their pension tax free.
Personal Pensions
For personal pensions the full amount is paid as a lump sum to the individual’s representatives and is subject to inheritance tax if it’s applicable.
PRSA’s
The full value of the fund passes to the deceased’s estate. No Income Tax is charged but normal Inheritance Tax rules apply.
6. I don’t understand how tax relief works and what the advantage is of saving into a pension?
The government provides an exceptional incentive to put money into your pension in the form of your tax back. As a financial adviser, I do not know of any other way to turn €60 into €100 via a risk-free investment… and I have looked. The only way I know of, is through a pension.
Whether you pay tax at the higher rate of 40%, or at the lower rate of 20%, the government is willing to give you tax back alongside your contribution. At a 40% marginal rate tax, for every €60 you put into the pension, you get back the €40 you paid in tax. At the 20% marginal tax rate, for every €80 you put into the pension, you will get back the €20 I paid in tax.
This article represents the views of Eoin Wilson. This article does not constitute Financial advice. Pure Finance Ltd is regulated by the Central Bank of Ireland.