{"id":3962,"date":"2022-04-04T11:47:42","date_gmt":"2022-04-04T11:47:42","guid":{"rendered":"https:\/\/linksus.net\/pricewatch-good-news-for-private-sector-workers-in-need-of-a-pension-the-irish-times\/"},"modified":"2022-04-04T11:47:42","modified_gmt":"2022-04-04T11:47:42","slug":"pricewatch-good-news-for-private-sector-workers-in-need-of-a-pension-the-irish-times","status":"publish","type":"post","link":"https:\/\/linksus2.linksus.net\/index.php\/2022\/04\/04\/pricewatch-good-news-for-private-sector-workers-in-need-of-a-pension-the-irish-times\/","title":{"rendered":"Pricewatch: Good news for private sector workers in need of a pension – The Irish Times"},"content":{"rendered":"

Sign up for alerts from The Irish Times
Just click on \u201cAllow Notifications\u201d <\/strong> on the message appearing on your browser to activate them.
We will send you a quick reminder in the future, in case you change your mind.
<\/i>
<\/i>
<\/i><\/p>\n

<\/span><\/div>\n

Putting aside a small amount from a young age is the best way to build a decent pension pot. Photograph: iStock
Your Web Browser may be out of date. If you are using Internet Explorer 9, 10 or 11 our Audio player will not work properly.
For a better experience use Google Chrome<\/a>, Firefox<\/a> or Microsoft Edge<\/a>.
Pricewatch has been talking about pensions for almost as long as it takes to qualify for one but it is rare that we have ever started any class of pension-related conversation with good news. Most of the time we bang on about time bombs and deficits and we alarm people by telling them how they have most likely missed the boat heading towards future financial security.
But not this week.
That is because the Government announced details of a new auto-enrolment pension scheme which should, if all goes to plan, save many people from living out their golden years in penury and wishing they had listened to that Pricewatch fella back when they were young and sprightly.
We have been waiting a long time for such a scheme as the Minister for Social Protection Heather Humphreys admitted last week when unveiling the details of a plan which will see around 750,000 private sector workers, over the age of 23 and under the age of 60 who earn more than \u20ac20,000 per year automatically enrolled in a pension scheme if they are not already signed up to an occupational pension scheme.
Workers and their employers will both contribute 1.5 per cent of the employees salary to the pension pot while the Government will add an additional \u20ac1 for every \u20ac3 invested by the worker. The money will be invested until the employee reaches retirement age.
Contributions will climb gradually and annually over the first 10 years of the scheme from matching 1.5 per cent of gross salary payments in the first three years, to 3 per cent in year four, 4.5 per cent from year seven and hitting 6 per cent in year 10.
People who are automatically signed up to the scheme will be able to walk away from it during a two-month window after six months, although they will only get back their own contributions and not their employer\u2019s or the Government\u2019s share and then, after two years, they will automatically be re-enrolled.
\u201cThis represents a significant milestone in implementing one of our key Programme for Government commitments. Every worker will have access to a workplace pension,\u201d Humphreys said, adding that it would change a system that has previously left workers \u201cto their own devices to navigate what is a complex world of pensions, to one in which choices and options are simplified on their behalf\u201d.
A central processing authority will be established to oversee the scheme and the money in the pension funds will be invested by four registered providers in four different investment portfolios of varying levels of risk. Management fees will be capped at a \u201cmaximum envisaged\u201d level of 0.5 per cent of assets under management.
The pension savings will transfer with a worker if they switch jobs, so employees will not have to move their pension across to a new scheme.
While anything that gets more people to start investing in a pension earlier with the added bonus of a Government contribution might seem like a great idea, there was some disquiet expressed by some in the industry last week.
Moyagh Murdock, the chief executive of Insurance Ireland, seemed downbeat in her hot take. \u201cThe Irish pensions landscape is already extremely complicated with multiple and often overlapping products and rules and there is a risk that auto enrolment will add to this,\u201d she said as she called for the current pension structure to be simplified.
Brokers Ireland didn\u2019t get the bunting out either. While its director of financial services, Rachel McGovern, said she agreed \u201cin principle with the introduction of an auto-enrolment pension scheme\u201d, she warned that the timing was \u201clikely to be difficult for individuals affected by the current increased cost of living. Employers are also likely to be concerned about the timing of the introduction of auto enrolment with some still \u2018on their knees\u2019 from the events of the last two years.\u201d
She also expressed disappointment with \u201ckey aspects of the proposals\u201d and said that \u201cwith a limit of 0.5 per cent on administrative, management and investment charges, it will not facilitate independent advice for consumers\u201d, and she questioned the need for a centralised processing authority. \u201cThis will have to be funded from somewhere. Is that somewhere contributor savings or is it going to be funded elsewhere? There is also a risk that it could become another Irish Water\u2019,\u201d she warned.
Ray McKenna of employee benefits advisers Lockton was more optimistic. He described it as \u201ca very welcome announcement that is long overdue for the one-third of employees that currently have no supplementary income outside of the State pension\u201d.
He did, however, warn that there\u2019s still a lot of work to be done to ensure scheme goes live in 2024. \u201cCritically, the Government will need to press the go-live button when it\u2019s ready, and we would be concerned that, just like other pension decisions such as increasing the retirement age, there may be a reluctance to act.\u201d
And we can\u2019t really afford a reluctance to act any more.
****
Let\u2019s start with the most basic question. What is the retirement age in Ireland? <\/strong>
You\u2019d think that was basic wouldn\u2019t you, but it\u2019s not. Many employees retire from their jobs at 65 but the State pension doesn\u2019t kick in until people turn 66 and there are plans to push that out, although we don\u2019t know when that might happen. It was due to happen last year but became something of a political hot potato and was quickly dropped. We should know more about the plans for retirement in the future later this month.
But I thought retirement at 65 was set in stone for good reasons?<\/strong>
The reasons are more arbitrary than good, to be honest. The age of 65 was first set by German chancellor Otto Von Bismarck in the 1860s.
And why did he pick 65?<\/strong>
Well, he wanted to ease social unrest by showing himself to be socially progressive \u2013 not a common feature of European leaders in the 19th century. But the canny German didn\u2019t want to pay too much for pensions, and with the average German living fewer than 65 years he was pretty sure most of his citizens would never get their hands on his socially progressive pension. But life expectancy \u2013 at least in the wealthy West, has increased dramatically over the past 150 years. Today Irish women can reasonably expect to live beyond 84 while \u2013 all things being equal \u2013 men will live until they hit 80. That is a lot of years of retirement income.
That\u2019s good news, right?<\/strong>
It is great news but it does pose a problem. Right now there are around five workers paying tax and PRSI for every retiree, but by the time we get to 2050 that figure is expected to be two workers per retiree. That is going to place a large burden on those two workers and on the State\u2019s coffers in the years ahead.
So that is where my private pension comes in, right?<\/strong>
Right. That is why the auto-enrolment scheme is so important. If the State pension won\u2019t keep us going we will need our own money too, but half of us don\u2019t have any class of private pension.
How much will I need in my pension fund when the time comes? <\/strong>
The average size of a private pension in Ireland is about \u20ac5,400 a year. Add that to the maximum State pension of \u20ac12,900 and you will have a retirement income of \u20ac18,400 per year or \u20ac1,533 per month. You are probably best placed to decide if that will be enough to allow you to live in the manner to which you have become accustomed. The basic rule of thumb is that an \u201cadequate\u201d gross retirement income is about 50 per cent of gross pre-retirement income. So if you earn \u20ac80,000 on the day you retire, you need a pension income of \u20ac40,000. If you are one of the lucky ones who gets the maximum State pension of \u20ac12,900 then you will need about \u20ac27,000. To get to that magic number, you would need a fund of between \u20ac700,000 and \u20ac950,000.
And how much will I need to save to get that? <\/strong>
That really depends on how old you are and how much you can save. if you want a private pension pot of around \u20ac20,000 per year and you start saving at 25, you will need to put aside around \u20ac300 gross per month. With tax relief at the top rate, it actually costs you only \u20ac164. If you start at 35, then you need to save around \u20ac500 a month before tax, while if you start at 45 then the monthly gross savings come in at close to a grand. Adding the 20 grand to the state pension will give you a pension of close to \u20ac33,000.
You mentioned tax relief is that still on the table?<\/strong>
It absolutely is. Saving for a pension actually gives you a triple bounce when it comes to tax. You can get a tax break on contributions, on investment growth and 25 per cent tax-free at retirement. On contributions, you can receive up to 40 per cent income tax relief (after USC and PRSI are paid) if you are a higher-rate taxpayer. Deposits in banks, credit unions and the rest charge Dirt at 33 per cent while investment growth of the fund over 30-40 years or more is tax-free and compound interest also performs its magic. And for defined-contribution pension savers based on your own savings, employer contributions (if they contribute) and stock-market returns, at retirement age you are entitled to take 25 per cent of your fund tax-free.
And what are the returns on a pension?<\/strong>
That depends on where you invest your money and when you cash it in, but over the past 30 years the average actively managed pension fund has returned around 8 per cent per year. If you had saved \u20ac250 per month over this 36-year period, your total savings would have been \u20ac107,750 and your total pot would have been \u20ac627,665 after charges, or almost six times your money back.
What about pension charges?<\/strong>
Charges occur at various stages: when a pension plan is set up, during the contribution phase and when a member exits from a plan. The charges can be borne by either the employer or the member. Anyone making a pension move or decision should consider the effect of charges. If they are too high, they can really eat into your pension pot.
What about topping up my pension?<\/strong>
Additional voluntary contributions (AVCs) are useful for those behind in their retirement savings or uncertain about the future value of their final-salary pension scheme, and will grow your pension pot quickly. Even if you can only afford 50 quid a month, it will add up over time.
****
Laura Doyle is the managing director of Progressive Financial Services in Dublin and has been preaching about pensions for years now. She is as good a poster-child for investing in your future as it is possible to get, and it is hard to argue with her when she crunches the numbers.
When asked what difference it makes to the size of a pension pot if someone starts putting money aside in the mid-20s compare to their mid 40s, she breaks it down in stark terms.
\u201dBased on a salary of \u20ac40,000, it would only cost \u20ac100 per month to save \u20ac2,000 per annum when you factor in the tax relief. If a person pays in from age 25, they\u2019ll have around \u20ac60,000 in the pot come their mid-40s; if they continue paying at the same rate, by age 70 there\u2019d be \u20ac250,000 in the pot.
\u201cWhereas the person who started paying the same amount from age 45 would only have around \u20ac87,000 by age 70. So those extra 20 years of paying in \u20ac100 per month only cost the person \u20ac24,000 \u2013 \u20ac100 x 12 months x 20 years \u2013 but increased their pot size by \u20ac163,000.\u201d
When asked what she thinks are the main obstacles to people \u2013 particularly young people \u2013 starting a pension, she points to two main barriers. \u201cPeople\u2019s perception of pensions, and bad marketing. Pensions are over-complicated and people \u2013 young and old \u2013 through no fault of their own, don\u2019t understand the value of them.
\u201cOver the past five years I\u2019ve seen an increase in demand for investing \u2013 there\u2019s a big appetite for trading platforms like eToro and Degiro, so why not the same for pensions? You can invest your pension in all the same shares or ETFs, but with one massive advantage \u2013 tax relief. It\u2019s essentially free money, and by not paying into a pension you\u2019re missing out on it.\u201d
She does have sympathy for someone in their 20s who just can\u2019t get their head around the need to plan for life in their 70s. \u201cPlanning for the short to medium term can seem impossible at that age, let alone 40+ years down the tracks. However, I would position paying into a pension at that age for the sole benefit of tax relief. And the power of compound interest cannot be understated: even paying a nominal amount, \u20ac10 per week, would make a massive difference when it comes to proper retirement planning in late 30s or early 40s.\u201d
If her number crunching doesn\u2019t convince people, what else would she say to someone to try to persuade them to start a pension?
\u201cHonestly, I just have conversations with people and show them the value of paying into a pension, and what they\u2019re missing out on by not paying into one. Almost everyone will proceed at some level \u2013 affordability is always an important factor, but with the minimum contribution starting at \u20ac10 per week and the flexibility of being able to increase\/decrease or stop\/start your contributions, there\u2019s an option for everyone no matter what their circumstances.\u201d
She is not entirely convinced the auto-enrolment scheme will be the game-changer some are hoping it will be. \u201cI don\u2019t necessarily think it will appeal to them, they might just see it as another deduction and less take-home pay if it isn\u2019t rolled out properly,\u201d she says. \u201cI think we underestimate the younger generation and have to give them more credit on their ability to make decisions for their future.\u201d
 Subscribe.<\/p>\n

Sign In<\/a><\/p>\n

Subscribe
Support
Irish Times products & services
About us
Our partners<\/p>\n

<\/i>
<\/i>
<\/i>
Invalid email or password.
Unfortunately USERNAME<\/span> we were unable to process your last payment. Please update your payment details to keep enjoying your Irish Times subscription. <\/p>\n

source<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

Sign up for alerts from The Irish Times Just click on \u201cAllow Notifications\u201d on the message appearing on your browser to activate them. We will send you a quick reminder in the future, in case you change your mind. Putting aside a small amount from a young age is the best way to build a […]<\/p>\n","protected":false},"author":869,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[],"tags":[],"_links":{"self":[{"href":"https:\/\/linksus2.linksus.net\/index.php\/wp-json\/wp\/v2\/posts\/3962"}],"collection":[{"href":"https:\/\/linksus2.linksus.net\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/linksus2.linksus.net\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/linksus2.linksus.net\/index.php\/wp-json\/wp\/v2\/users\/869"}],"replies":[{"embeddable":true,"href":"https:\/\/linksus2.linksus.net\/index.php\/wp-json\/wp\/v2\/comments?post=3962"}],"version-history":[{"count":0,"href":"https:\/\/linksus2.linksus.net\/index.php\/wp-json\/wp\/v2\/posts\/3962\/revisions"}],"wp:attachment":[{"href":"https:\/\/linksus2.linksus.net\/index.php\/wp-json\/wp\/v2\/media?parent=3962"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/linksus2.linksus.net\/index.php\/wp-json\/wp\/v2\/categories?post=3962"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/linksus2.linksus.net\/index.php\/wp-json\/wp\/v2\/tags?post=3962"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}