31st July 2017
Central Statistics Office reported recently that 47% of men in Ireland have some form of pension, and 46% of females have one….there’s a surprise, the men leading the way!!
Our age also seems to have a large impact as to whether we bother or indeed believe we can afford to contribute to a pension; 36% of workers aged between 25 and 34 had a pension and 55% aged between 35 and 44 had one. Based on these CSO figures you could argue that around half of the workforce have a pension of some form. As we all know statistics can hide a lot of ugly truths……how many of those with a pension will actually get a meaningful pension from it when they get to retirement age….and this is the challenge we will look at in this episode.
We Will Get Our Just Deserts:
Deserts is apparently the plural of ‘desert’ which is ‘that which one deserves’….honestly I always assumed it was to do with the jelly & ice-cream type of desserts…..but had never given it much thought in fairness! The same is most certainly true of Pensions. It would be hard to put it any more simply than I am about to now; You will only get a lot out if you put a lot in. If you are haphazard about your approach to funding for retirement then it is quite likely that the benefits you get from yours may be haphazard too.
Blame Your Advisor:
It may seem a bit pomp of us but your advisor (assuming you have one!) is absolutely at the coal-face of ensuring you know exactly where your level of income in retirement is headed. As we like to harp on about here ‘begin with the end in mind’ , otherwise what’s the point in beginning!
If you find out upon retiring that your income is a million miles (or euros!) off what you were expecting, then much of that blame falls on your advisor. Now, if your advisor had been trying and trying to get through to you that you need to x,y & z in preparation for retirement yet you were only willing to do a,b & c then it’s on you unfortunately!
So I Have A Pension, What Could Possibly Go Wrong!?
Imagine for a second that you are all of a sudden telegraphed onto a perfectly good aircraft. You are sitting beside an open door of the aircraft at 12,000 feet with a parachute strapped to your back. Yer man is shouting at you to jump out the door and to pull the parachute chord in 15 seconds. What is your first thought right now………………….? While I have yet to test it in clinical studies I guess a lot of us think about that life-saving piece of equipment strapped to our back……will it open, will it work right, was it packed right, how fast will I descend……a whole host of concerns might enter our minds…..
We should, in all fairness, be asking the same questions of our pensions. It is our parachute in retirement. It will, or rather it should, stop our income going from the heights of 12,000 feet to ground zero. That is just too big a fall for most of us to comfortably handle.
The fact that most of us reading this are not at the point of jumping out of the aircraft, we are many years from jumping, does that mean we shouldn’t start to pack our parachute in a way that works for us??
When The Parachute Is Not A Parachute: Trivial Pensions:
Trivial Pension is actually the condescending term given to a pension option given to people whose total pension pots are under a certain size or benefit. Option A is available if your fund is less than approx €7,400 then you might be able to get your hands on the entire amount with only paying 10% tax on that lump. This is based on your fund, assuming you bought an pension annuity from a life company, would provide less than €330 per year. (7,400 * 4.5% annuity rate would give €330 per year)…..sorry but that was important to outline! In this instance you would get a grand sum of about €6,500 to enjoy over the course of a 20 year retirement….while it is something yes it ain’t gonna be much of a parachute.
If you have more than €8,000 but less than €20,000 then you could avail of Trivial Pension Option B, taking the entire amount in one go, but paying full tax rate and USC on it….which is quite a blow to an already relatively small amount on which to be relying on for retirement.
So Could I End Up With Only A Trivial Pension?
There are many situations which will result in someone having a relatively small pension pot, some which are out of their control and genuinely impact on their ability to prepare financially. There are other reasons also which can result in people having a ‘trivial pension’.
One of the most guilty initiatives was whereby individuals were given the option to transfer a lump sum (€7,500) from their SSIA into a Pension and receive another €2,500 of a top up from the Government as a thank you bonus! If you are too young to remember SSIA’s then it’s well for you! The result of this well intended initiative was a lot of people doing just that, for the sake of getting the €2,500 bonus. Many had no other pension pot so they had to go the ‘trivial pension’ route and many paid the tax due on them. The fact of the matter is that many people in this circumstance may have been better served doing something else entirely!
Leaving the lovely SSIA’s aside, let’s take a look at a more common scenario which plays out every day here in Ireland. Let’s say you are finally arm-twisted into a pension….the constant bombardment of guilt and pressure makes you cave in!! You start one, just to get one and remove the guilt and sense of financial self-destruction you may have felt by not having one!
You contribute €300 per month for a few years. You are pretty chuffed to see your Annual Benefit Statement after 2 and half years state that thanks to your diligent savings and some upward fund performance you have a fund of €10,000 built up. Kudos!
For one reason or another (as we saw in the last episode) your circumstances change and you no longer contribute to your pension. You leave it invested in the fund and promise yourself to come back to it and contribute once things change. But you don’t! You keep putting it on the long finger and never restart the contributions…….the result is a parachute that is not much of a parachute, and one which will unlikely make a meaningful difference to your financial well-being in retirement. Which is the whole point of starting a pension isn’t it??
So Should I Save More Towards Retirement?
Maybe you should and maybe you shouldn’t, would be our take on it! If for instance you were headed for a ‘€20,000’ trivial pension and you decided to bump up your savings in order to give you a €40,000 pension (unless you are the beneficiary of some really skillful financial planning guidance and it is done through a company or company sponsored scheme which would allow you to get a large chunk of cash out tax free) then you may not be much better off!
If you had a pension pot of €40,000 (after you take the 25% tax free lump sum it’s 30k!), are married, and want to buy a pension with that €30k, you may be looking at an annual income from that lump sum of in the region of €1,000 per year.
What I would advise, if you have loved ones, parents for example, who you feel may be in this sort of pension ‘no man’s land’ then please pass this message to them, insist that they meet with their advisor or someone competent they trust to show them what the exit strategy will be from their pension……..again, begin with the end in mind. There may still be time to make some meaningful changes to how they are going about their retirement plans.
So Should We Bother With Pensions At All?
That’s a loaded question! Absolutely definitely explore the options. But be sure to determine how you will exit the plane, will the parachute you hoped actually be the one you get…..and that is a fair question to ask before you head on up there!
Thanks for reading & sharing.
QFA | RPA | APA | Qualified Coach
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